Federalizing Caremark


American corporations have a long history of carelessness and Caremark has made it difficult for shareholders to recover against them for it. In 2018, for example, the world discovered that Donald Trump had wrongfully collected the personal data of up to 87 million Facebook users. Facebook’s failure to address the unchecked collection and use of users’ data cost the company more than $50 billion in market capitalization alone. Despite clear losses, shareholder litigation has thus far been unsuccessful. The normal governmental response to such corporate failures of oversight is to saddle corporations with more federal oversight, even though this purely reactive behavior has consistently failed to curb corporate misconduct. The consequence for regulated firms is thus an ever-increasing cost of compliance with no marked change in behavior. Meanwhile, shareholders are left with few options for recovery because, in the face of asymmetrical information, there is insufficient evidence to meet onerous pleading requirements found in state and federal laws such as Caremark.

This Article proposes a better solution—the use of federal administrative determinations as presumptive evidence of corporate mismanagement. It describes the existing limitations of both SEC and common law-based protections in the context of shareholder derivative litigation for lapses in oversight, explores the factual commonalties of those plaintiffs that have been successful in this area, and proposes that Delaware can preempt corporate misbehavior, while reducing the need for more federal oversight, by relying on federal administrative fact-finding combined with the Caremark standard to promote shareholder successes in derivative litigation. Corporate law scholarship rarely acknowledges its intersection with administrative law. Thus, scholars have not considered the possibility that shareholders can easily rely on the determinations of federal agencies to establish evidence of a director’s failure of oversight under Caremark.