Richards Layton & Finger

In re Clovis: Considering Caremark Claims after Marchand

November 2019

In In re Clovis Oncology Inc. Derivative Litigation, the Delaware Court of Chancery construed the Delaware Supreme Court’s opinion in Marchand v. Barnhill to mean that the board’s duty of oversight under Caremark “must be more rigorously exercised” for corporations operating “in an environment where externally imposed regulations govern its ‘mission critical’ operations.” The Clovis Court stated that, for purposes of adequately pleading that the board failed to monitor effectively its compliance system or controls, the plaintiff must show that “red flags” of non-compliance had been waved in such a manner that they become apparent to a careful observer. The Court concluded, however, that the “careful observer is one whose gaze is fixed on the company’s mission critical regulatory issues.” While the Court’s opinion in Clovis does not purport to change longstanding principles involving the duty of oversight under Caremark, it does provide substantial guidance regarding the manner in which the Delaware courts will assess whether a plaintiff has met its pleading-stage burden to demonstrate that the board failed to effectively monitor risks.