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In re Caremark Int'l

Court of Chancery of Delaware, New Castle

August 16, 1996, DATE SUBMITTED ; September 25, 1996, DATE DECIDED





Pending is a motion pursuant to Chancery Rule 23.1 to approve as fair and reasonable a proposed settlement of a consolidated derivative action on behalf of Caremark International,  [**2]  Inc. ("Caremark"). The suit involves claims that the members of Caremark's board of directors (the "Board") breached their fiduciary duty of care to Caremark in connection with alleged violations by Caremark employees of federal and state laws and regulations applicable to health care providers. As a result of the alleged violations, Caremark was subject to an extensive four year investigation by the United States Department of Health and Human Services and the Department of Justice. In 1994 Caremark was charged in an indictment with multiple felonies. It thereafter entered into a number of agreements with the Department of Justice and others. Those agreements included a plea agreement in which Caremark pleaded guilty to a single felony of mail fraud and agreed to pay civil and criminal fines. Subsequently, Caremark agreed to make reimbursements to various private and public parties. In all, the payments that  [*961]  Caremark has been required to make total approximately $ 250 million.

This suit was filed in 1994, purporting to seek on behalf of the company recovery of these losses from the individual defendants who constitute the board of directors of Caremark. 1 The parties now propose [**3]  that it be settled and, after notice to Caremark shareholders, a hearing on the fairness of the proposal was held on August 16, 1996.

 ] A motion of this type requires the court to assess the strengths and weaknesses of the claims asserted in light of the discovery record and to evaluate the fairness and adequacy of the consideration offered to the corporation in exchange for the release of all claims made or arising from the facts alleged. The ultimate issue then is whether the proposed settlement appears to be fair to the corporation and its absent shareholders. In this effort the court does not determine contested facts, but evaluates the claims and defenses on the discovery record to achieve a sense of the relative strengths of the parties' positions. Polk v. Good, Del.Supr., 507 A.2d 531, 536 (1986). In doing this, in most instances, the court is constrained by the absence [**4]  of a truly adversarial process, since inevitably both sides support the settlement and legally assisted objectors are rare. Thus, the facts stated hereafter represent the court's effort to understand the context of the motion from the discovery record, but do not deserve the respect that judicial findings after trial are customarily accorded.

Legally, evaluation of the central claim made entails consideration of the legal standard governing a board of directors' obligation to supervise or monitor corporate performance. For the reasons set forth below I conclude, in light of the discovery record, that there is a very low probability that it would be determined that the directors of Caremark breached any duty to appropriately monitor and supervise the enterprise. Indeed the record tends to show an active consideration by Caremark management and its Board of the Caremark structures and programs that ultimately led to the company's indictment and to the large financial losses incurred in the settlement of those claims. It does not tend to show knowing or intentional violation of law. Neither the fact that the Board, although advised by lawyers and accountants, did not accurately predict [**5]  the severe consequences to the company that would ultimately follow from the deployment by the company of the strategies and practices that ultimately led to this liability, nor the scale of the liability, gives rise to an inference of breach of any duty imposed by corporation law upon the directors of Caremark.

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698 A.2d 959 *; 1996 Del. Ch. LEXIS 125 **


Subsequent History:  [**1]  Released for Publication by the Court October 4, 1996.

Disposition: Fee of $ 816,000 plus $ 53,000 of expenses advanced by counsel awarded.


settlement, compliance, patient, indictment, referral, Ethics, good faith, monitoring, employees, reimbursement, shareholders, practices, policies, healthcare provider, predecessor, regulations, losses, proposed settlement, negotiations, contracts, senior, reporting system, allegations, Sentencing, violations, decisions, discovery, infusion, appears, investigations

Civil Procedure, Discovery & Disclosure, General Overview, Business & Corporate Law, Shareholder Actions, Actions Against Corporations, Settlements, Releases From Liability, Trials, Jury Trials, Province of Court & Jury, Evidence, Inferences & Presumptions, Management Duties & Liabilities, Fiduciary Duties, Business Judgment Rule, Directors & Officers, Causes of Action, Negligent Acts of Directors & Officers, Defenses, Shareholders, Shareholder Duties & Liabilities, Criminal Law & Procedure, Sentencing Guidelines, Adjustments & Enhancements, Aggravating Role, Sentencing, Duty of Good Faith, Governments, Fiduciaries, Remedies, Costs & Attorney Fees