Wednesday, October 12, 2011
The Barest Hint of Caremark Duties
The Barest Hint of Caremark Duties, But Asserted by a
Stranger to the Corporation
The decision of the Court of Appeals in Woodall v. Bdesh, Inc., 2011 WL 2935567 (Ky. App. 2011) (Not to be Published) is focused upon employment law, but it contains as well an interesting sidenote on corporate governance. That sidenote, in turn, deserves a sidenote on who may enforce corporate governance obligations.
Woodall, an employee of Bdesh, Inc., brought suit against her employer and Gulsan Kabir, the president of and a shareholder in Bdesh, based upon the alleged inappropriate conduct of “Irfawn,” another employee of Bdesh. Woodall asserted that Bdesh and Kabir retaliated against her after reporting Irfawn’s conduct.
As an aside, the decision notes that service had never been made on the corporation. How and why that was the case is never explained. In light of the numerous alternative mechanisms by which service may be made on a corporation or other entity, some of which require only transmission and not a showing of receipt (KRS § 14A.4-040(2)(c)) of the service, it is hard to see how it could ever be the case that a corporation would not be served.
Ultimately most of the harassment claims were dismissed on summary judgment, a decision upheld by the Court of Appeals. What interests me is an assertion that Kabir violated a Caremark obligation.
The Delaware Chancery Court’s Caremark decision, greatly simplified, recites that as a component of their fiduciary obligations, directors have a duty to adopt and maintain corporate compliance programs designed to detect wrongdoing and to bring malfeasance to the attention of management and the board. In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).
Woodall sought to charge Kabir with violating his duties under KRS § 271B.8-420(1), asserting that this statute, requiring an officer to act “in good faith, on an informed basis and in a manner he honestly believes to be in the best interests of the corporation,” created an obligation “to inform himself of the actions of Bdesh’s employee and the corporation’s business.” 2011 WL 2935567 at *5. Woodall relied as well on KRS § 271B.8-240(2), it defining the standard (“ordinary prudent person in a like position”) required of an officer in order to act on an informed basis.
While the Court of Appeals recognized that these statutes require an officer to act on an informed basis, it rejected the notion that there is thereby created a duty of ab initio investigation. “However, these statutory provisions do not require a corporate officer, with no basis for doing so, to ask employees if they have sexually harassed anyone ….” Id.
What I think to be the more interesting question is what would have been the result had the court held there to be a duty of affirmative investigation? Assume even that the company suffered a pervasive history of sexual harassment and the company had in place a program to actively monitor and respond to those allegations. In my view the outcome would have been the same, namely no claim. An officer’s fiduciary duties flow to the corporation or to the corporation and the shareholders. Under no formulation do the fiduciary obligations flow to employees and others with a contractual relationship to the corporation. While the officer’s obligations may be enforced in a direct suit by the corporation or a derivative action brought by a shareholder, a mere employee cannot, in the name of the corporation, vindicate its rights. Woodall simply had no capacity to look into the discharge (or not) of fiduciary obligations in Bdesh, Inc.