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Delaware Litigation Against Corporate Boards Instructive for Directors

A Delaware court recently found that directors faced potential liability for a breach of their duty of oversight and allowed plaintiffs to proceed on a claim that a corporation’s board of directors was aware of and ignored “red flags” showing that a drug company misrepresented the performance a core drug in clinical trials. Separately, a June 2019 opinion from the Delaware Supreme Court held that the directors of another corporation allegedly failed to institute board-level reporting systems for a critical compliance risk for the company. “The quick succession of these decisions confirms that Delaware courts take seriously directors’ oversight duties,” according to a client alert by attorneys from Paul Hastings.While mutual fund boards’ oversight role is slightly different from that of corporate boards, the court rulings should encourage vigilance in fund directors. The lawyers wrote that directors must not simply trust that management has everything running smoothly. “Directors must instead understand the organization’s critical compliance risks, receive reports on those risks, and act on any red flags presented to the board.” Additionally, boards with the help of the CCO and independent counsel, may wish to: ensure there are appropriate board-level reporting systems for each critical risk; determine whether each critical risk can be managed by the board or a new or existing board committee; remember their obligation to question management if the directors perceive even “yellow flags” of potential misconduct; and reexamine director and officer liability insurance coverage needs.

 
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