Skip to Search
Skip to Main Content
Main Content


News & Publications


Godfrey & Kahn Updates


Press Room


Avoiding Shareholder Suits: Compliance Systems May Shield Corporate Directors

Spring 1997

A September 1996 decision by the Delaware Chancery Court provides guidance as to how corporate boards may be able to shield themselves from shareholder suits by establishing compliance systems to detect wrongdoing within the corporation.

Corporate directors have a duty to shareholders to pay attention to and take reasonable care in monitoring the activities of the corporation and its employees. When a corporation suffers a financial loss as a result of wrongdoing by its officers or employees, shareholders may sue the directors of the corporation claiming a breach of their duty of care. The essence of such a claim is that the directors should be held personally liable for losses suffered by the corporation which could have been prevented by the directors if they had discharged their duty of care.

In In re Caremark International Inc. Derivative Litigation, Caremark shareholders claimed that the Caremark directors breached their fiduciary duty of care to Caremark in connection with alleged violations by Caremark employees of various laws and regulations applicable to health care providers. The Delaware Chancery Court determined that the Caremark directors had not breached their duty to appropriately monitor and supervise the business of the corporation. The court’s decision pointed to several actions taken by the board to ensure compliance: (1) adoption of an internal audit plan monitored by a board committee; (2) requirement of comprehensive reviews of compliance policies and the compilation of an employee ethics handbook concerning such policies; and (3) appointment of the corporation’s chief financial officer to serve as Caremark’s compliance officer.

The Delaware court emphasized that corporate directors must take active steps toward ensuring compliance. The court indicated that directors must make sure that "information and reporting systems" are in place and work well enough to provide directors with sufficient information to make "informed judgments" about corporate compliance. Thus, the key to director insulation from shareholder suits appears to be the creation and monitoring of a compliance system to ensure the receipt of sufficient information to allow for well-considered judgments by the directors.

How may a corporation design a compliance system which will provide directors with the information they need to fulfill their corporate responsibilities and insulate them from shareholder suits alleging breach of their duty of care? The compliance system adopted by the Caremark board provides useful ideas for establishing compliance systems for other corporations, but should be viewed as a guideline rather than a mandate. The effectiveness of any compliance system will depend greatly on the circumstances of individual corporations. Clearly, the Caremark decision should remind directors that their corporation must have adequate information and reporting systems in place which will provide them with enough information to make informed judgments about compliance.

Related Attorneys

Media Contact 

If you have a media request or need an attorney with particular knowledge for comment, please contact Kyle Mondy, Marketing & Communications Manager, at 414.287.9481 or


Subscribe today to receive firm newsletters and blogs, client updates, seminar announcements, and more according to your preferences and areas of interest.

Recent News

Please wait while we gather your results.

Recent Updates

Please wait while we gather your results.

Disclaimer and Legal Notices

Copyright © 2019 Godfrey & Kahn, S.C.

Attorneys at Law - All rights reserved.


Client Login