Delaware Supreme Court Case Serves as a Reminder for Board Oversight

    

Delaware Supreme Court Case Serves as a Reminder for Board Oversight

A 2019 Delaware Supreme Court decision in the case of Marchand v. Barnhill highlights the importance of a board’s duty to oversee key risk and compliance issues of the organization they represent. Although the case doesn't signify a change in standards, it serves as an important reminder that being actively engaged in compliance is critical to the operation of the business.

Overview of the Case

In early 2015, one of the largest ice cream manufacturers in the country, Blue Bell Creameries, had an outbreak of listeria. As a result, the company recalled all of its products, shut down production at all of its plants, and laid off a third of its workforce. Unfortunately, Blue Bell was unable to contain the spread of listeria in its products and as a result, three people died. 

This wasn't the first time one of the company's plants failed to maintain proper health and safety standards. As far back as 2009, there were signs of trouble ranging from multiple FDA violations to continued Board of Health infractions in Blue Bell’s Alabama, Oklahoma, and Texas facilities. Additionally, in 2013, Blue Bell had five positive tests for listeria as well as positive tests in 2014 and 2015.

As a result of the fatal listeria outbreak in 2015, shareholders experienced substantial losses and one stockholder filed a suit against Blue Bell. The complaint alleged that two key executives “breached their duties of care and loyalty by knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell’s food-making operations.” This meant “that the directors breached their duty of loyalty under Caremark.”

A Caremark claim is a claim that a company's directors breached their duty of care and loyalty with regards to compliance oversight. 

After a lower court granted Blue Bell’s motion to dismiss, the case was appealed to the Delaware Supreme Court, which reversed that holding. The Court concluded that “the complaint supports an inference that no system of board-level compliance monitoring and reporting existed at Blue Bell.”

Takeaways for Businesses

Businesses should use this case as an example of important measures that a board should undertake. There were several areas of compliance and safety that Blue Bell’s board failed to demonstrate and that led to the Court finding that they had violated their duties. Specifically, the Court emphasized the importance of:

  • Identifying key risks within the business, particularly as it pertains to compliance.
  • Creating a system of monitoring those risks and reporting them both internally and to the board. Likewise, a board should actively seek out information pertaining to the compliance of the business.
  • Regularly reporting to the board any concerns or issues so that they can be addressed before they evolve into a compliance violation. The reports should create a complete picture of the state of business, including both the good and any red flags that may exist.
  • Auditing the system to ensure its ongoing effectiveness.
  • Documenting issues and including them in the board minutes as evidence that they’ve been identified and addressed on a regular basis.

Good Faith Effort

This case should serve as a reminder of a business’s need to have a system in place whereby compliance is a key concern not only of management but also of the board. Where feasible, experts should be utilized to identify and assess key risks to the organization and to establish a system of open communication, reporting, and resolution of which the board is a key component. Once in place, this system should undergo continuous self-audits to ensure that it is working, and that care is being taken to maintain its integrity.

Although boards can’t oversee every compliance decision, they are expected to have a system in place that helps to make sure they are aware of issues regarding business operations, legal compliance, and financial performance, so those issues can be managed and addressed. When a board makes a good faith effort to exercise a duty of care and loyalty, it will go a long way toward mitigating violations that can result in costly fines, legal proceedings, and reputational harm.

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