THE ICONIC CASES IN CORPORATE LAW, Macey, ed., West/Thomson, 2008
23 Pages Posted: 22 May 2008
Good faith produces good procedures and good procedures produce good outcomes. These statements are descriptive of much of Delaware's corporate law as well as the Delaware courts' approach to fiduciary duties. In re Caremark International Inc., Derivative Litigation exemplifies this approach through its emphasis on monitoring and good-faith processes and procedures as well as through its procedural place in history. This essay explores the procedural elements of Caremark and the cases that followed and expanded its contours while focusing on the ways in which Caremark's procedure and substance are intertwined.
Caremark exemplifies the connections between procedure and substance in several ways. For example, Caremark and its progeny shifted the focus from exculpable care claims to non-exculpable good-faith claims. It took several opinions to change the motion-to-dismiss pleading standards, but Caremark initiated this transition. Further, as the pleading process changed and cases survived the motion to dismiss, good faith evolved from a procedural pleading mechanism to a defined, substantive directorial obligation, expanding the duty of loyalty from its traditional, financial-conflict-based focus. Additionally, the pressure for the settlement in Caremark arose, in part, out of the then-recent federal organizational sentencing guidelines: rules created through a process designed to diminish perceived inequities and judicial discretion. Caremark is also a procedural opinion, approving a proposed and agreed-upon settlement (thus generally eliminating the likelihood of appeal), but rather than simply evaluating the claims and terms, it develops and sets forth descriptions of director obligations in an era of tremendous corporate growth and expansion. Sarbanes-Oxley's section 404, although several years later in time, creates federal disclosure requirements around internal controls and procedures - the same type of systems at issue in Caremark. In doing so, Congress and the Securities and Exchange Commission pressured Delaware to update is law on directorial roles. The result was the other good-faith opinions in this essay that arose in part from the federal process and pressure.
Keywords: Van Gorkom, Board of Directors, Caremark, Business Judgment Rule, corporate governance, securities fraud, federalism, Delaware, Good Faith, Fiduciary Duty, Enron, Sarbanes Oxley, directors, liability, corporate law, derivative litigation, corporation, oversight, Delaware corporate law
JEL Classification: G34, K22, K41, M14
Suggested Citation: Suggested Citation
Sale, Hillary A., Good Faith's Procedure and Substance, in re Caremark International Inc., Derivative Litigation. U Iowa Legal Studies Research Paper No. 08-20; THE ICONIC CASES IN CORPORATE LAW, Macey, ed., West/Thomson, 2008. Available at SSRN: https://ssrn.com/abstract=1133570