The Delaware Court of Chancery recently dismissed a Caremark claim that challenged a board of directors’ oversight of legal compliance.  The court observed that the board of directors and its audit committee had been briefed on the underlying compliance issues, the corporation had taken steps to remediate its alleged non-compliance, and the board’s remediation decisions should not be second-guessed.


 Pettry v. Smith involved a stockholder derivative lawsuit against the directors and certain officers of FedEx Corporation challenging their oversight of compliance with laws regulating cigarette shipments.  The corporation had faced previous enforcement actions and paid penalties for its alleged non-compliance, and the corporation ultimately decided to prohibit most cigarette shipments.

 The plaintiff argued that the directors had consciously failed to monitor or oversee the corporation’s operations, thus disabling themselves from being informed of risks or problems requiring their attention.  The court dismissed the complaint, finding the plaintiff failed to plead that the board “knew of evidence of corporate misconduct—the proverbial ‘red flag’—yet acted in bad faith by consciously disregarding its duty to address that misconduct.”

 In its ruling, the court found the plaintiff’s argument inconsistent with the allegations in the complaint, which, among other things, claimed that the board of directors had been updated 11 times during a two-year period on legal compliance matters and that the audit committee had been briefed at least six times on the enforcement actions.  The board of directors had also formed a committee to consider (and reject) a previous shareholder demand relating to alleged illegal cigarette shipments and settlement agreements with regulators, which again was evidence that the board was aware of and had looked into the matter.  In addition, the corporation had reprimanded employees for the alleged non-compliance, which action the court said – even if taken by management without a specific board directive – ran “contrary to the ‘do nothing’ environment within a company that often fosters board-level Caremark liability.”  Finally, the court reviewed various remediation actions taken by the corporation, including new training measures for employees.  While the plaintiff argued those actions came too late, the court said the alleged delay “does not support a reasonable inference of bad faith” and noted various factors relevant to the timing of the remedial actions, including allowing the then-pending enforcement actions to play out.


 Pettry shows the importance of documenting the board’s oversight process through minutes, meeting agendas, and presentations.  In this case, an objective record of the board’s awareness of the issue combined with remedial steps taken by the corporation refuted allegations of a “do nothing” board.  It also prevented a finding of bad faith even though the non-compliance allegedly continued for several years after it was first identified by regulators.

 Board oversight continues to be a contextual process without a one-size-fits-all approach.  The clear take-away from Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), is that oversight must prioritize “mission critical” risks.  Pettry did not involve “mission critical” risks – in fact, the court said an “infinitesimal percentage” of the corporation’s shipments contained illegal cigarettes.  Still, legal compliance is an important focus of board oversight, and the Pettry litigation illustrates the protection offered by briefing boards or committees on enforcement actions, trends in non-compliance, and settlements with regulators even when they do not rise to the “mission critical” level.

 Another take-away centers on the importance of corporate culture and the corporation’s overall attitude toward compliance.  The plaintiff in Pettry argued that the board of directors breached its duties by failing to take specific action, such as issuing directives to take specific remedial action.  Regardless of whether that allegation was true, the corporation in fact had taken remedial steps.  Thus, management’s efforts to bolster legal compliance in turn protected the board of directors.  Furthermore, there was no “cover up” by management or informational vacuum at the board level.  Rather, the record demonstrated that the board was made aware of the compliance issue and the corporation took concrete steps to address it.  As the court noted, “our law does not demand board action in all instances; if action is taken by the Company to remediate the alleged harm, that is a reflection of a lack of bad faith on the part of the Board.”