Inflated Performance Results Do Harm to Biotech Board
The tide seems to be turning in cases involving the so-called Caremark standard as the Delaware Chancery Court reviews motions to dismiss in these shareholder actions. Under Caremark, directors can face personal liability for violating their fiduciary duties if they, fail to implement a board reporting system, or fail to monitor the reporting system’s operations which would have made the board aware of potential risks. In this particular case, a biopharmaceutical company had a promising drug under development for the treatment of lung cancer. After positive early results the clinical trial revealed the drug likely would not be approved for market by the FDA. After a precipitous stock drop related to these events, stockholders sued members of the board of directors claiming they breached their fiduciary duties by failing to oversee the clinical trial and then allowing the company to mislead the market regarding the drug's efficacy by inflating performance results. The court denied dismissal. While a board’s fiduciary duty may be found in its good faith effort to implement an oversight system and then monitor it, this case demonstrates that when a company operates in a regulated market, the oversight and monitoring are essential components to exercising good faith.