Governance Insights 2025 A Preview of 2025: 10 Legal Updates GCs, Boards and Investors Need to Know
Board Oversight Boards and management should consider their responsibilities to identify, monitor and manage critical risks to their businesses on an ongoing basis. Developments in Delaware litigation on risk oversight provide a backdrop against which corporate stewards can think about the role of Canadian directors and officers in managing critical risks.
CAREMARK CLAIMS IN DELAWARE
Caremark claims, named after the Delaware case In re Caremark International Inc. Derivative Litigation (1996), are actions brought against directors for breaching their oversight duties as established under Delaware law. Caremark oversight duties provide that directors face potential liability for breaching their oversight responsibilities if, with respect to key compliance risks facing the company, they have failed to implement or monitor reporting systems and controls. Caremark pleadings have involved a variety of fact patterns, including allegations of failure to oversee food safety risks leading to a listeria outbreak; ignoring red flags over clinical trial issues; failure to oversee aircraft safety standards; and, in the recent case of McDonald’s Corporation Stockholder Derivative Litigation (2023), failing to address workplace harassment. Additionally, McDonald’s extended the reach of Caremark duties to corporate officers, holding that they too may have a duty of oversight, particularly when the matter falls within their area of responsibility. The bar to successfully make out a Caremark claim is high, and there are open questions about the extent to which Caremark duties extend beyond oversight of critical compliance matters to business risks more generally, particularly given the well-entrenched judicial deference afforded to a board’s business judgment. The case law has largely circumscribed Caremark claims to “extreme events” or “mission-critical risks,” the oversight of which has been so egregiously deficient that it constitutes bad faith on the part of the directors (or officers).
OVERSIGHT DUTIES IN CANADA
Although Canadian courts have not recognized Caremark duties per se , it is not implausible that a Caremark -style claim regarding management and oversight of significant risk could, with the appropriate facts, be brought in Canada on the basis of existing common law and statutory obligations owed by directors to the corporation, including the duty of care and loyalty. Canadian securities laws also speak to the centrality of the board’s oversight function. The CSA expects that a board’s mandate should explicitly acknowledge directors’ “responsibility for the stewardship of the issuer,” including “the identification of the principal risks of the issuer’s business, and ensuring the implementation of appropriate systems to manage these risks.” Of particular focus in the rules is the role of the board in ensuring the integrity of financial and other continuous disclosure. As well, as
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Davies | dwpv.com
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