A Unique Caremark Twist Amidst Bankruptcy

A recent decision by the Delaware Court of Chancery in Giuliano v. Grenfell-Gardner, et al. involves a notable twist on the familiar Caremark line of oversight liability cases. After the subject company went into bankruptcy, a bankruptcy trustee gained access to the company’s documents and elected to take over derivative claims against directors and officers. In doing so, the trustee pointed to information supporting certain Caremark claims — namely that the board had not imposed adequate reporting systems, and certain officers did not sufficiently inform the board. Beyond the bankruptcy trustee’s unique access to all company documents, the opinion also serves as a useful reminder for corporate directors and officers that the best defense against Caremark claims remains proactive, well-documented, and robust governance practices.

Factual Background

Teligent, Inc. (“Teligent” or the “Company”) was a New Jersey-based pharmaceutical manufacturer that produced generic versions of certain prescription topical creams and injectables (the “Generics”). The Generics were subject to the Food and Drug Administration’s (“FDA”) regulatory oversight and generally could be marketed only upon FDA approval. To obtain approval from the FDA, Teligent was required to demonstrate, among other things, that its products were bioequivalent to already approved drugs and were manufactured in full compliance with the FDA’s current regulations.

Because FDA approval was essential to bring any generic product to market, effective regulatory oversight and compliance were “mission critical” to Teligent’s business model. During an approximately five-year period from 2016 to 2021, however, the company received a number of warning letters from the FDA concerning regulatory failures. Throughout much of this period, the Company’s SEC filings represented that its facility was FDA compliant.

In September 2016, the FDA conducted an unannounced inspection of Teligent’s Buena, New Jersey facility and issued a Form 483 letter citing five “clear, specific, and significant” deficiencies in the Company’s manufacturing and testing of its generic products. A follow-up letter in March 2017 noted that Teligent was not in compliance with required recordkeeping, a necessary prerequisite for approval.

Although the Company’s officers made the board aware of these FDA communications by early 2017, the issues persisted and even worsened over the following years. Multiple subsequent inspections identified repeated issues, culminating in a 2019 Warning Letter in which the FDA concluded that Teligent’s operations did not conform to CGMP requirements and that no further ANDA approvals would be granted until the Company remediated its deficiencies. This effectively halted the Company’s ability to generate revenue.

The Court noted that internal emails suggested that Teligent’s officers understood the gravity of the compliance problems, but failed to implement effective remediation — and in some instances, appeared to discuss concealing the extent of deficiencies from investigators and the board. The Court also observed that, despite awareness of the FDA’s escalating warnings, the board of directors did not establish formal reporting structures, independent oversight, or specialized regulatory review.

In late 2021, another FDA inspection identified additional deficiencies, which led to the derivative lawsuit that culminated in this opinion. Teligent filed for Chapter 11 bankruptcy, and ultimately, the bankruptcy plan administrator elected to prosecute the derivative claims against six directors and officers.

Procedural Posture and the Litigation

The suit generally followed the familiar Caremark framework, but because it was pursued by the bankruptcy administrator rather than a shareholder, it differed in two important respects. First, because the bankruptcy administrator pursued the action on behalf of the Company, the plaintiff had full access to Teligent’s internal documents and emails — far more than the typical stockholder plaintiff. Second, the administrator did not have access to director-level emails, leaving a gap in the record regarding the board’s internal deliberations.

These dynamics created an interesting twist for the Court at the motion to dismiss stage: whether the informational asymmetry between officer- and director-level communications should influence the pleading standards for Caremark claims, particularly those based on “red-flag” theories of oversight failure.

It dismissed the “red-flag” theory against the directors, but sustained the “information systems” theory allegations against them. On the former, the Court held that merely alleging awareness of potential compliance issues was insufficient to plead a “red-flag” theory, explaining that a plaintiff must also allege facts showing that a fiduciary knew the flag was “red” — that is, the director recognized the severity of the issue — and consciously chose to ignore it. The Court ruled that the allegations did not demonstrate that the directors fully appreciated the seriousness of the FDA compliance problems or knew management was concealing information. As for the “information systems” allegations, the Court found that the complaint adequately alleged that the board (1) did not establish nondiscretionary reporting mechanisms; (2) neglected to seek independent regulatory expertise or training; and (3) did not maintain meeting minutes reflecting meaningful engagement with compliance oversight.

As for the officers, the Court sustained oversight claims predicated on a “red-flag” theory against two officers (and dismissed those allegations against the CFO, because FDA regulatory issues were not within that officer’s “core” job responsibilities). Internal emails reflected that the two officers discussed how to frame — or downplay — information to the board and the FDA, which supported an inference that they consciously disregarded their oversight duties.

Key Takeaways

This case underscores that Delaware courts continue to apply Caremark rigorously, but also adapt its framework to evolving contexts — including post-bankruptcy direct actions. For corporate directors and officers, the practical lessons remain clear:

1. Document oversight — Board-level discussions of regulatory risks should be memorialized in meeting minutes with sufficient detail.
2. Establish mandatory reporting channels — Non-discretionary escalation protocols help ensure the board receives timely notice of critical issues.
3. Engage qualified advisers — Independent counsel or consultants with regulatory expertise can provide credible oversight and help mitigate risk.

Even as Giuliano v. Grenfell-Gardner presented an atypical procedural posture, the decision ultimately reinforces a familiar message: Good governance, active oversight, and clear documentation remain the strongest protection against breach of fiduciary duty claims.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.