Delaware Court of Chancery Reaffirms Heightened Standard for Caremark Claims — But Reminds That Outlier Facts Yield Outlier Results

On August 24, 2020, Vice Chancellor Sam Glasscock III issued a rare denial of a motion to dismiss so-called Caremark claims in a case against directors of AmerisourceBergen Corporation (the Company). Although the decision reiterates the significant pleading burden that such oversight claims must meet, and exemplifies that only extraordinary facts typically permit a plaintiff’s claims to proceed to discovery, it is also a useful reminder that board-level best practices can, among other things, help address and limit any such liability.

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Caremark Claim Allowed to Proceed Against Audit Committee Members Based on Oversight Failures

The Delaware Chancery Court recently denied a motion to dismiss a shareholder derivative suit against directors and officers of Kandi Technologies Group, Inc., a publicly traded Delaware corporation based in China. Hughes v. Hu (Del. Ch. Apr. 27, 2020). The company had persistent problems with financial reporting and internal controls, encountering particular difficulties with related-party transactions dating back to 2010. In March 2014, the company disclosed material weaknesses in financial reporting and oversight, including a lack of audit committee oversight and a lack of internal controls for related-party transactions. The company pledged to remediate these problems. However, in March 2017, the company disclosed that its preceding three years of financial statements needed to be restated and that it continued to lack sufficient expertise and/or controls relating to accounting and SEC reporting.

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