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Monday
Jul142014

Will Walmart be the new Caremark?

I attended the oral argument Thursday in the Delaware Supreme Court in the Walmart case. The world's biggest retailer is asking the Delaware supremes to overturn a lower court ruling last year requiring it to disclose files from an internal FCPA probe to the shareholder plaintiffs.

The FCPA Blog reported Thursday's hearing here. And I wrote about the case here.

This week I'd like to talk more about why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.

*     *     *

Reflecting the seriousness of the case, the Delaware Supreme Court had a full panel of five justices to hear Walmart's appeal. Justice Leo Strine had recused himself because he presided over the lower court in the Walmart action. Justice Strine was replaced on the panel for this appeal by a judge from a lower Delaware court.

The case, by the way, is styled Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc., CA No. 7779-CS, Delaware Chancery Court (Wilmington).

For nearly an hour the justices listened carefully and asked some pointed questions of both sides. There was a sense of gravity and consequence in the court room. Why?

Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?

There's long and well-established precedent that a director who participates in criminal conduct such as the bribery itself can be sued by shareholders. That also applies to a director who participates in covering up criminal misconduct and misleads the board to avoid personal liability. 

Beyond those two clear examples is a third category of behavior that goes by the shorthand name of Caremark, named for a 1996 Delaware case (In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 968-70 (Del. Ch. 1996). Even today, Caremark claims by shareholders against directors are a hotly contested area.

The Caremark guidelines generally say that if there has been bribery abroad and the board is accused of not knowing about it or allowing it to happen, and the company is thereby damaged, the board is not liable provided there has been a information reporting and monitoring system, i.e. a compliance program.

The Caremark guidelines don't expect or require the board to know everything that goes on everywhere in the company. But the board is expected to implement and oversee a compliance program that controls and responds to the overall risk.

But the Caremark guidelines continue to be controversial because "paper compliance programs" can consistently fail to detect bribery that happens under the nose of a board that's not engaged enough to know what kind of risk is developing or not doing anything about it.

Some believe the Caremark guidelines are counterproductive. That do nothing directors can avoid liability to shareholders for overseas bribery (and accountability to the public) by citing the existence of a paper compliance program and a few stage-managed meetings a year with a compliance officer.

So the questions that hung in the air Thursday in Wilmington was, Does the Delaware Supreme Court need to adjust the Caremark guidelines? And will Walmart be the case that compels the change?

I'll talk more about Thursday's hearing -- the arguments by both sides and the questions from the justices -- in my next post.

 ________

Michael Scher is a contributing editor of the FCPA Blog. He has over three decades of experience as a senior compliance officer and attorney for international transactions. He can be contacted here.

Reader Comments (2)

In Stone v. Ritter, the Delaware Supreme Court provided the following necessary conditions for director oversight liability under the so-called Caremark standard: (i) a director utterly failed to implement any reporting or information system or controls; or (ii) having implemented such systems or controls, a director failed to monitor or oversee the corporation’s operations. The court held that both situations require a showing that a director knew that they were not discharging their fiduciary obligations and courts have widely recognize that a director’s good faith exercise of oversight responsibility may not necessarily prevent employees from violating criminal laws or from causing the corporation to incur significant financial liability or both.
July 14, 2014 | Unregistered CommenterProfessor Mike Koehler
Whatever becomes of this case will certainly serve as fuel for the compliance furnace. Yet, no one should mistake that it will be "gold dust" for the Board room or a panacea. Caremark is approaching its 20th anniversary and Compliance Officers continue to fight the good fight. No one has to convince the Board that sales is necessary to keep the organization viable. Why, after all these cases and guidance, should the Compliance Officer have to tread gingerly to make the point that compliance is as important as sales?
July 14, 2014 | Unregistered CommenterJoan D. Hogarth, Esq.
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