Stone v. Ritter
Citation and Court
Stone v. Ritter, 911 A.2d 362 (Del. 2006)
Facts
AmSouth Bancorporation, a BB&T subsidiary, paid $50 million in fines and penalties after regulators found it failed to detect money laundering activities. Shareholders brought a derivative suit alleging that the directors violated their fiduciary duty of oversight by failing to implement adequate compliance and reporting systems to detect the illegal conduct.
Issue
What must shareholders show to hold directors personally liable for failing to exercise adequate oversight of corporate operations?
Holding
The Delaware Supreme Court affirmed dismissal of the derivative suit, holding that plaintiffs failed to show that the directors either utterly failed to implement any reporting or information systems, or, having implemented such systems, consciously disregarded red flags signaling violations.
Rule / Doctrine
Director oversight liability under the Caremark standard requires plaintiffs to show one of two things: (1) the directors utterly failed to implement any reporting or information systems or controls, or (2) having implemented such systems, the directors consciously failed to monitor or oversee their operations. Good faith is an essential component of the duty of loyalty, not a separate duty; a sustained or systematic failure to exercise oversight constitutes a lack of good faith.
Significance
Stone v. Ritter clarified and refined the Caremark standard, situating the oversight duty within the duty of loyalty (via the good faith requirement) rather than the duty of care. This has significant implications because the business judgment rule and exculpatory charter provisions under DGCL §102(b)(7) do not protect against loyalty violations. The case establishes that the bar for oversight liability is intentionally high — directors are not liable for mere negligence in oversight, only for conscious disregard.