Financial Institution D&O Liability After Caremark and McDonald's

Abstract

The March 2023 failure of SVB Financial Group, parent of Silicon Valley Bank (“SVB”), becomes the second-largest bank failure in American history. Subsequent congressional hearings point to poor investment decisions and risk control on the part of management and ineffective regulatory supervision. During the past decade, many U.S. regional banks “gorg[ed] on commercial real-estate loans and related investments in big cities . . . . With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy.” By September 2023, The Wall Street Journal reports that “[b[anks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.”

Vice Chancellor Lasters’ first McDonald’s opinion got a lot of attention for extending Caremark doctrine to cover officers. But there usually won’t be demand futility for officers (directors can be trusted to decide whether to sue them), and Vice Chancellor Laster later dismissed the officer claim against a McDonald’s officer on that basis. However, one place where officer claims really do become likely, though, is in bankruptcy. SVB’s parent company, incorporated in Delaware, has already filed for bankruptcy. Importantly to the Caremark claim context, banks face myriad mission critical risks.

Keywords: AmerisourceBergen, audit committee, Blue Bell, boards of directors, Boeing 747 Max, Caremark, Clovis Oncology, corporate governance, Credit Suisse, cybersecurity, data breach, FAA, FDA, Hughes, Marchand, Marriott, McDonald’s, mission critical operations, oversight liability, ransomware, regulation

JEL Classification: G01, G18, G21, G38, H12, K22, M48, R30, R38