When corporations misbehave, the normal government response is to saddle the industry with more federal oversight requirements. But reactive policies fail to curb corporate misconduct and can incentivize corporations to ignore or break the law due to the ever-increasing cost of compliance. Even though shareholders have to foot the bill when the corporations get caught ignoring or breaking the law, it is extremely difficult for shareholder plaintiffs with genuinely meritorious claims to recover for damages because, under Caremark’s requirements, it is nigh-impossible to demonstrate the bad faith necessary to survive a motion to dismiss using conventionally available information; of the seventeen Caremark claims that have been brought in Delaware since the case was decided, only five have survived a motion to dismiss.
Therefore, this Article proposes “federalizing Caremark.” That is, the Delaware Court of Chancery, being the extremely influential metonymy of American corporate law that it is, should formally recognize and adopt the holdings common to the five successful cases. All of those cases were able to show the officers exhibited per se bad faith by leveraging agency-developed information regarding red flags that were ignored, breaches of the duty of oversight, and knowing violations of the law for profit. If Delaware courts chose to effectively federalize Caremark, then the per se bad faith standard would enable shareholder derivative suits to survive the dreaded motion to dismiss and possibly even win as a matter of law upon a motion for summary judgment. Federalizing Caremark would also more effectively prevent corporate misbehavior than would continually increasing oversight and regulatory requirements because it merely utilizes mechanisms already in place (i.e., agencies, regulations, shareholder claims, state courts).
Corporate law scholarship rarely acknowledges its intersection with administrative law. In doing so, however, this Article establishes a bright line administrative remedy to the overwhelmingly steep hurdle shareholders face in derivative litigation.