Publication
2nd Circuit defers to executive will on application of sovereign immunity
The Second Circuit recently held that federal common law protections of sovereign immunity did not preclude prosecution of a state-owned foreign corporation.
Boards of director members (Board) face increased scrutiny of their risk oversight function and the mitigation and crisis management strategies they implement pre-crisis, both during the crisis and post-crisis. The Board's role in risk oversight has evolved substantially since September 1996, when the Delaware Chancery Court issued its In re Caremark1 decision setting the standard for board oversight compliance. As recently as last year, the Delaware Supreme Court issued an opinion in Marchand v. Barnhill2 reaffirming the Caremark decision and elaborating the established standard for Board compliance with risk oversight responsibilities. This has led to a proliferation of rulemaking related to the Board's risk oversight function. To list just a few examples, the US Securities and Exchange Commission's (SEC) rules require proxy statement disclosure of the Board's role in risk oversight and the extent of that oversight, the NYSE listing standards require New York Stock Exchange (NYSE) listed companies' audit committees to have a written charter that includes a requirement to discuss risk assessment and management policies, and Dodd-Frank requires that some financial entities and banks have a risk committee that operates under a formal written charter.
Following recent cases involving Blue Bell Creameries USA, Inc. (Blue Bell) and in light of the outbreak of the novel COVID-19 (coronavirus), this alert provides (I) a checklist for Boards and their counsel to ensure compliance with the Caremark standard and similar standards, (II) considerations for management and directors in managing the coronavirus-related risks and (III) considerations for multinational supply chains.
Under the Caremark decision, the Board must "attempt in good faith to assure that a corporate information and reporting system…exists." This standard has led to a wide practice of Boards and management developing corporate compliance programs, monitoring those programs and making sure Boards stay informed regarding the status of implementation and functioning of those programs. On June 18, 2019, the Delaware Supreme Court in Marchand v. Barnhill, allowed a lawsuit to proceed after the court held that the plaintiff satisfied the high-threshold Caremark standard, stating that, after distributing ice cream tainted with a deadly listeria strain, Blue Bell's Board had breached its duty of loyalty by failing to make a good faith effort to ensure that a corporate information and reporting system existed. Facts included the Blue Bell's Board failure to implement a food safety committee, as well as its failure to discuss and identify safety issues, and its lack of an information reporting system at the Board level.
Based on the Marchand v. Barnhill's decision and its elaboration of the Caremark's standard, we recommend that counsel and their Boards take the following practical steps:
The Caremark and Marchand v. Barnhill decisions show that Delaware courts expect Boards to take risk oversight seriously. In addition to operational and reputational consequences, failure to comply with risk oversight requirements can lead to shareholder derivative suits and subject Board members to personal liability.
The use of outside advisers and/or independent investigators can be a great addition to internal measures to assess the appropriateness of the board oversight programs in place and the company's self-auditing.
In addition to the actions discussed above, with respect to the emerging pandemic risk of the recent coronavirus outbreak, we encourage management and directors to consider the following aspects in connection with enterprise risk management, compliance programs and risk oversight functions. SEC compliance will require companies to actively monitor the recent SEC updates regarding coronavirus and to assess the effects of the outbreak on the company's business. Companies should:
For companies with supply chains, distributors, customers, or international operations in China or other geographic areas that have been impacted by the coronavirus, consider these actions:
Board oversight is a critical part of the Board's fiduciary and loyalty duties. The recent case of Blue Bell and the currently developing outbreak of the coronavirus demonstrate the need for Boards and in-house counsel to exercise an increased level of scrutiny of and rigorous compliance with Boards' risk oversight programs. Boards should keep the Caremark decision, Marchand v. Barnhill, and industry best practices in mind when considering the state of their risk oversight programs, as these benchmarks help clarify the standard expected by the Delaware Chancery Court. Further, the Boards of publicly listed companies must remember to keep additional standards in mind, such as SEC regulations and NYSE/NASDAQ listing standards. Finally, counsel to Boards should, when possible, thoroughly assess existing risk oversight programs, engage with Boards to focus them on the relevant issues, ask the tough questions and take appropriate steps to address current risks.
A special thanks to law clerk Philippine Dumoulin, who works under the direct supervision of Julia Rix, for her assistance in preparing this content.
Such policies might address:
Publication
The Second Circuit recently held that federal common law protections of sovereign immunity did not preclude prosecution of a state-owned foreign corporation.
Publication
Facing the fast-growing development of AI across the globe, particularly Generative AI (GenAI), the G7 competition authorities and policymakers (Canada, France, Germany, Japan, Italy, the UK and the US) and the European Commission met in Italy on 3-4 October 2024 to discuss the main competition challenges raised by these new technologies in digital markets.
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