AHLA's Speaking of Health Law
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AHLA's Speaking of Health Law
Trends and Developments in Director/Officer Liability: New Developments in Officer and Director Liability Matters
In the third episode of this three-part series focusing on director/officer liability, Rob Gerberry, Senior Vice President & Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery LLP, about new developments in officer and director liability matters. They discuss the Delaware Chancery Court’s recent decisions in the McDonald’s Corporation stockholder derivative litigation; why health lawyers should care about what is coming out of the Delaware courts and the level of activity there; and the connection between corporate governance, officer and director liability, and the Department of Justice’s renewed focus on corporate crime and individual accountability. From AHLA’s Business Law and Governance Practice Group.
Listen to the first episode, which discusses the concept of officer and director liability and related standards of care, here.
Listen to the second episode, which discusses parties with primary jurisdiction to challenge officer and director conduct, here.
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Speaker 2:Hello again. I'm Rob Guber. I'm the Senior Vice President and Chief legal Officer of Suma Health and a member of the H L A Board. I wanna welcome you back to our third in a series of HLA podcasts on the important topic of trends and developments and director and officer liability. This three part podcast is designed as a supplement to our directory series of podcasts that explored basic governance and issues affecting hospitals and health systems. In this new series, we've explored in our first two, uh, episodes, the basic concept of officer and direct reliability and related standards of care. In our second podcast, we identified the parties with primary jurisdiction, the challenge officer and director of conduct, and the perspective from which they address these issues. Today. In our third and final segment, we'll discuss new developments in officer and director liability matters, including the Delaware Chancery Courts recent decision in the McDonald Corporation stockholder derivative litigation. So with that, I'd like to introduce my friend and colleague, Michael Peregrine, and thank him again for bringing his insight stage line.
Speaker 3:Rob, thanks again. Delighted to be with you and our fellow members.
Speaker 2:So, Michael, to kick us off today, our first question is, why should health lawyers representing non-for-profit corporations, uh, have concerns about what's coming out of the Delaware courts?
Speaker 3:Well, I, I think there are two issues, Rob. Number one, it's always important that they're able to explain to their internal clients why we care about Delaware law. And as most of our listeners know, that Delaware is actually a unified state. Corporate law statute incorporates both business and not-for-profit corporation concepts. Uh, but Delaware has, uh, perhaps the most, uh, well-developed, uh, set of, uh, case law on issues that affect corporate governance and corporate liability, including the long line of Caremark cases. Um, we, we never wanna suggest that Delaware law automatically applies to the states in the other states in which our members have clients or our rep, their clients are located or cited in. But, um, we often see those parties who wish to pursue claims, uh, alleging breach of duty will quote, refer to, uh, the decisions of Delaware law. And oftentimes, the Attorney General will by be in the absence of any relevant law in their own state on a particular fiduciary duty issue of default to Delaware law and, uh, and apply that logic. So, uh, number one, I think we, we care about Delaware law because it's going to come up as part of the discussion with our internal clients about, uh, what it says and how it might apply in our own state. And number two, uh, we have, um, a, a long line of case law and activity, uh, in the, in the Delaware courts on matters of risk, risk identification, risk disclosure, conflicts of interest topics that are relevant to our board members and, and the Caremark cases, uh, Rob are, are paramount in that they're also, uh, conflicts of interest cases, recusal and abstention cases. Uh, it, it, it matters, I guess is the best way to answer the question. We, we care because it's on point and it matters, and it could be used by us as a defense. It could be used against us, um, in a plaintiff's action.
Speaker 2:So, for Michael, those of us that don't follow the corporate governance cases that are occurring across the nation, uh, in the same way that you do, what is the level of activity that you're seeing in Delaware and in other states?
Speaker 3:Uh, Rob, I think there's a lot of activity in Delaware that's relevant to chief legal officers of healthcare systems, including not-for-profits. Uh, I, I would say that they, as we've kind of talked about a little bit, they involve iterations of the Caremark standard, which are vital importance right now to, um, corporate compliance plans and board oversight. Uh, they involve conflicts of interest. They involve, uh, ultra virus transactions. They involve, uh, transaction fairness, uh, and they involve, uh, situations such as books and records requests. So there's a lot going on there. And I think the key cases are usually covered by the corporate law journals, uh, on, usually on a regular basis. I, what's also interesting though, in terms of, uh, how best to follow, I personally find, uh, that a, a good way to really track, uh, what some of the more interesting cases that arise in other states is the Chronicle of Philanthropy, which, uh, runs a monitoring service. But there, if there's a major nonprofit controversy, especially in litigation, they'll find it. Um, as you and I have talked about before in a lot on our podcast series last year, uh, there are a number of states that, that are aggressive in terms of their supervision of charitable assets. New York, Massachusetts, Pennsylvania, um, Minnesota, certainly California. And, and these are states where if, if you are operating in them, you should have some kind of monitoring system. If, especially if the State Attorney general, uh, posts, uh, cases or regulations or, or, um, uh, new policies in that regard. New York does a, I think, a really good job in that regard. Uh, you know, and then every now and then you'll get an important case, like came out of Minnesota in the Bremer Trust case involving trustee liability. Uh, and that's relevant to those states where the attorney general or state law, uh, views corporate board members as trustees as opposed to board, uh, corporate directors. So again, I think you've, especially for states that, uh, for, or healthcare systems that operate in multiple states, you've got to pretty much keep your head on the swivel and monitor what's coming, uh, uh, along in those states, in those state courts and out of the ags offices.
Speaker 2:So I think a lot of us, though, I've heard about the McDonald's case. Michael, as you look at that case and its implication for duty of care responsibilities, what would you highlight for our membership?
Speaker 3:Uh, well, I'm still mad that I got onions in my cheeseburger the other day, uh, Rob, but we'll put that aside for purposes of this discussion. I, I think what people have heard a lot about in terms of the McDonald's case is it is the most consequential of, uh, the series of, uh, cases in, in informing the Caremark standard that have occurred in the last couple of years. And we need to keep in mind that Caremark, uh, which came out of the healthcare industry, uh, is, is not formally, uh, adopted for as, for not-for-profit corporations. But if there was ever a case to which a plaintiff or an Attorney General would default to its Caremark, and again, it relates to, um, a standard for direct reliability that's based on two distinct claims. Uh, one that, uh, the directors either utterly failed to implement any reporting system or controls to facilitate board oversight. And we, we call that the information systems complaint, or the information systems obligation, or let's say they've implemented such a system or controls that they've consciously, you know, this is, is bad faith. They consciously fail to monitor or oversee its operations. So they become essentially disabled from being able to respond to red flags that might pop up in the board meeting. We've just seen a number of cases, especially since 2019, uh, that addressed this. Um, McDonald's is important because it makes two fundamental refinements to the Caremark standard. And again, we care about this because it affects our, the information flow from management to the board. It affects the way the board responds to red flags. It expects the level, respects the level of engagement of the board, uh, in, in operations. And, uh, we, we should note that there were actually two decisions in McDonald's. One was on the motion to dismiss, uh, and then there was the actual, uh, decision, uh, on the merits. So the, there we care about, uh, again, uh, McDonald's for two principle reasons. The first is, um, I don't know if it was as shocking as some people said, but it was the very clear articulation in the first of the two cases that corporate officers, not just board members, that corporate officers owed the fi a fiduciary duty of oversight as to matters within their areas of responsibility. Um, you could argue that they've always had that, and this doesn't change a lot. But now, Rob, I think you've gotta kind, uh, for officers, uh, you've got to play a little bit more to what the court said. It's, you know, uh, what is, who is an officer, uh, what are those duties that they're responsible for? Is that different than anything else they've had before? And importantly, uh, what are their areas of responsibility and how do they manifest those duties? Again, this is, uh, Delaware law only, but I think it would be a mistake not to address this within the context of your own organization, because as I said before, plaintiffs, uh, and the Attorney general will likely refer to, uh, Delaware law when pursuing an oversight breach claim. Uh, the second of these refinements is nuanced, but I think it will use some terms that some, uh, of our listeners will remember. Uh, the big Caremark decision in 2019, uh, was in, uh, the, the Marand case involving, uh, the poisoned yogurt. And it was significant because it was a case that basically said, sure, you've got a compliance program, but it's really crummy. And it was so crummy that you didn't realize fast enough that, um, you were, you're, it was failing to identify mission critical risks like product safety. And, and from that case, uh, it drove a lot of us, me included, to focus on, uh, an upstream management to board reporting system focused on mission critical risks, like in our industry, quality of care. Why McDonald's is important in this regard is that it made clear that we're talking about information reporting on a lot more stuff than just mission critical risks. We're talking about the undefined term of central compliance risks of the organization. So we care about McDonald's not only for these technical refinements to the law, but I think frankly, the practical implications on how Lee corporate leadership approaches risk identification and evaluation generally. And corporate compliance specifically, what's the impact of people telling corporate officers they have for ary duties? Uh, what's the impact of telling them that they have to report up, uh, critical issues, compliance issues within their scope of responsibility, um, uh, what is referred to as a red flag? All of these things, Rob, I think really, really stirs the pot. Uh, it's tough to, uh, not have some of these issues on the agenda for both the board and the senior leadership team going forward.
Speaker 2:Michael, in light of decision mission critical oversight responsibilities, you mentioned, is this even a stronger platform for organizations to build out a robust enterprise risk management program?
Speaker 3:It is, but I think that they're drawing a distinction. I think this is where it's important to draw a distinction between enterprise risk and corporate compliance. And I think that, uh, we wanna, I think what's really important, frankly, Rob, is to, uh, yes, certainly enterprise risk is important. What's a is to understand what a rel red flag really constitutes. And that's a tough thing to define, but I think it's really important to look at all this in the context of what DOJ has been doing in terms of its new compliance program guidelines, uh, the new rules with respect to, uh, individual accountability, the, the new standards on voluntary self-disclosure and the whole, uh, business about executive compensation and corporate compliance. Uh, it really opens the door, again to a revisitation of how the board interacts with risk and compliance and now, uh, executive compensation.
Speaker 2:So as we look at current events, Michael, I know you've suggested there's also some value in what's coming outta the courts and the regulators concerning the Silicon Valley Bank. Why do you believe that's the case?
Speaker 3:Well, I think that's interesting. I was, uh, a lot of people have been interested in Silicon Valley Bank, just as a matter of curiosity, but, you know, hey, what, it's the banking industry. What do we care? We're healthcare. We're not worried about liquidity, we're not worried about capitalization. Uh, we're not worried about, um, uh, loans and things of that nature. But actually, when you look at it, Rob Silicon Valley Bank is going to be the gift that keeps on giving for those of us who worry about directors and officers liability. Uh, if the, the recent report from the Federal Reserve Bank, and I'm not accustomed to reading reports from the Federal Reserve Bank, but this one, I had to, they're saying two things. Um, they're saying number, number one, we screwed up. We, the Fed did not closely monitor banks like Valley Bank. We, we were laing our supervision. We took our eye off the ball, whatever you call it. And that was a problem. But number two, this was also a colossal management screw up. Uh, management was focused on the wrong things, did not have a good risk management program, didn't have a chief risk officer in place, and the board essentially just turned a blind eye to it. The board was not, uh, was not aware enough of the complex and volatile nature of the industry, was not aware of the deeply exposed situation, which the bank found itself. Uh, and interestingly enough, uh, allegedly authorized moving the goal posts on the risk profile of the organization in order to essentially get good grades on, uh, risk management. So the Silicon Valley bank situation is something that will have much, uh, more significant impact on board oversight of risk management than I think people in the industry realize right now. Uh, I, and as I say, I, as as this plays out further, healthcare board members and our, and our colleagues in A H L A are going to see a lot more of their own organizations and their own boards and management teams, uh, in the facts of Silicon Valley Bank than they would probably like to see.
Speaker 2:So, m lastly, you've noted your work with our in-house council practice group. There's a connection between the Caremark decisions corporate governance officer and director liability in the Department of Justices renewed focus on corporate crime and individual accountability. Can you expand on your thoughts there?
Speaker 3:I think it's important to look at these issues, rob, through a variety of perspectives. Uh, but it, one thing that now is clear is it's very tough to look at officer and director liability without a a, a kind of a unified system of conversation reporting and disclosure. Uh, you've got to have all of the officers who were involved in risk management, uh, able to talk and converse on a horizontal as well as vertical proposal. We need to have the executive compensation people in the discussion. We need to have regulatory compliance people in the discussion. Uh, we need to have, uh, the corporate governance officers who worry about, uh, who, uh, the agenda and, and meeting times and meeting material in on the discussion. We need to focus, uh, on all aspects of legal and regulatory risk, uh, and cultural risk. Uh, it, it just can't be a, we can't afford silo approaches and the Department of Justice's new actions really drive this home. You know, look, we, we need to have in the room if, if they're saying we're gonna monitor ephemeral messaging, but we need to have the CIO or the chief technology officer in the room. Uh, if we, if we're gonna focus on executive compensation as a compliance disincentive, well, we need to have the, um, uh, HR VP in the room. If we're going to talk about a voluntary self-disclosure program that will, uh, require warp speed response by the board in terms of whether or not they're going to engage in that program, we need the advice of skilled white collar council in the room. So I think in, in order of all these developments that relate to, uh, officer and director liability, uh, the, the underlying message, which may not be super well received internally is, uh, this is absolutely a time in which we have to have a village discussion. And we, the right hand needs to know what the left hand is doing. It's no time for siloed activity.
Speaker 2:Well, Michael, thank you again for your thoughts today. This wraps it up for today's episode and for our three-part examination of officer and Direct Liability Trends. We hope you've enjoyed these podcasts. We also encourage you to monitor our regular H l A publications. Michael, thank you for taking the time to join us. Thank you for sharing your thoughts with our membership. Uh, we appreciate as we navigate, uh, these challenging times.
Speaker 3:Rob, thanks to you and to the L team broadly in pulling these podcasts together.
Speaker 1:Thank you for listening. If you enjoy this episode, be sure to subscribe to a H L A speaking of health law wherever you get your podcasts. To learn more about a H L A and the educational resources available to the health law community, visit American health law.org.