California Court Adopts the Caremark Standard for Oversight Claims

The decision articulates the standard for plaintiffs asserting derivative claims based on an alleged failure of oversight by directors and officers of California companies.

Nearly three decades ago in the seminal case In re Caremark International Inc. Derivative Litigation, the Delaware Court of Chancery set forth a test to determine whether a director failed to “exercise reasonable oversight.” The court concluded that a director could be held liable for such claims only where a plaintiff could establish a director’s “lack of good faith as evidenced by sustained or systematic failure” of oversight. These director oversight claims became broadly known as “Caremark claims.” As Caremark case law continued to develop, most plaintiffs attempting to meet this high standard did not survive a motion to dismiss, though in recent years Delaware courts have denied dismissal in a handful of cases.

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