## Facts

- Caremark International Inc. operated in a highly regulated health-care environment where business depended significantly on physician referrals.
- Federal fraud-and-abuse laws restricted payments or arrangements that could induce physician referrals.
- Government agencies investigated Caremark’s physician compensation and referral practices beginning around 1991.
- In 1994, Caremark faced federal criminal charges, pleaded guilty to one count of mail fraud, and agreed to pay substantial criminal fines, civil penalties, and reimbursements totaling about $250 million.
- Shareholders filed a derivative action alleging the directors breached fiduciary duties by failing to monitor and prevent unlawful referral-related conduct by employees.
- The alleged wrongdoing focused on oversight failures rather than any single affirmative board decision.
- By 1992, Caremark had adopted policies and compliance procedures intended to detect and prevent regulatory violations.
- The parties negotiated a settlement centered on additional governance and compliance reforms, with no substantial monetary payment by directors.
- The parties jointly sought court approval of the derivative settlement under Delaware Chancery Court Rule 23.1.

## Issues

1. Whether the proposed derivative settlement, providing primarily compliance reforms rather than monetary recovery, was fair, reasonable, and adequate to the corporation in light of the claims’ likely merits.
2. What standard governs director liability under Delaware law for failure of board oversight of legal compliance.

## Decision

- The Court of Chancery approved the settlement as fair and reasonable.
- The court found the expected litigation value low because plaintiffs’ probability of establishing director liability for oversight failure was extremely small on the record presented.
- The court stated that directors have a duty, in good faith, to attempt to assure that the corporation has an information and reporting system reasonably designed to provide timely, accurate information relevant to compliance and performance.
- The court held that oversight liability requires a sustained or systematic failure of the board to exercise oversight—an “utter failure” to attempt to ensure a reasonable reporting system—amounting to bad faith.
- Because the board had adopted compliance measures and undertook monitoring efforts, the record did not support a finding of the sort of sustained failure necessary for personal liability.

## Legal Principles

- A board’s duty of care includes an oversight obligation to make a good-faith effort to ensure reasonable internal information and reporting systems exist.
- Director monetary liability for oversight failures is exceptionally difficult to prove and generally requires evidence of a sustained or systematic failure to exercise oversight, not merely imperfect monitoring.
- Oversight liability is tied to good faith: an “utter failure” to implement or monitor reporting systems, or conscious inaction in the face of known violations, may support liability.
- Corporate losses from employee illegality, standing alone, do not establish a breach of fiduciary duty by directors; plaintiffs must show board-level bad-faith failure and causation.
- When reviewing a derivative settlement, the court evaluates the relative strength of claims and defenses on the record to determine whether the consideration exchanged for releases is fair to the corporation.

## Conclusion

The court approved a non-monetary derivative settlement because the oversight claims were unlikely to succeed under a demanding standard that limits director liability to bad-faith, sustained failures to ensure reasonable compliance-related reporting and monitoring systems.


In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996)