Federalizing Caremark


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.

About the Author

Associate Professor, SMU Dedman School of Law. B.A., Duke University, J.D., University of Texas at Austin School of Law. The Author would like to thank the participants in the 2022 ILE Fall Corporate Roundtable and the 2022 Richmond Junior Faculty Forum, and the faculties of DePaul University College of Law, The University of Texas School of Law, Seattle University School of Law, and Loyola University Chicago School of Law for helpful comments and suggestions. The Author acknowledges the research assistance of Francis Morency, Hope Barnes, Maeve Harris, and Jasmine Cooper. Associate Professor, Elon University School of Law. B.A., University of North Carolina at Chapel Hill; M.P.P., University of Minnesota Humphrey School of Public Affairs; J.D., University of Minnesota Law School. The Author would like to thank the editors of the Yale Law Journal; participants in the Sixteenth Annual Lutie A. Lytle Black Women Law Faculty Writing Workshop; and participants in the Corporate and Securities Litigation Workshop, particularly Professor Roy Shapira, for helpful comments and suggestions. The Author gratefully acknowledges the excellent research assistance of Dakota Price, Anthony Bland, and Timberly Southerland, and the terrific editing of the UCLA Law Review.