Legal lesson: Board oversight of corporate operations is a must

Nov. 21, 2019

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

By Sander P. Kline, business attorney

Board service is a crucial role in any corporation, and individuals serve for a variety of reasons. For some, board service is a natural step in a long and successful career with a corporation. For many, board service is an important piece of a family legacy. For others, board service is a trade, enabling corporations to access expertise otherwise lacking. Each board member brings to the table a unique perspective on the business and marketplace. But what each board member shares is a responsibility to oversee the activities of the corporation and protect the ongoing interests of the business. Failure can expose board members to liability for their shortcomings.

A recent case out of Delaware highlighted the role board members must play in supervising the operations of a corporation, as well as the risks they may incur if they do not. In Marchand v. Barnhill, the Delaware Supreme Court considered the tragic facts surrounding a massive recall of Blue Bell brand ice cream.

Blue Bell Creameries USA Inc. failed to contain listeria in its manufacturing plants. This failure ultimately resulted in three consumer deaths, a mass recall of the company’s ice cream, a full halt to production and layoffs affecting over one-third of Blue Bell’s employees. As relevant to the corporation’s shareholders, this disruption also provoked a liquidity crisis, resulting in a private equity investment that heavily diluted the existing shareholders.

One shareholder brought a claim against Blue Bell’s officers and directors, claiming their failure to oversee food safety and their disregard for the corporation’s ongoing contamination problems constituted a breach of the duties of care and loyalty.

Delaware’s high court held that the shareholder had presented sufficient evidence to survive dismissal of the fiduciary claims. This determination, which suggests that the officers and directors of Blue Bell may have violated their fiduciary duties to the corporation, is based on a variety of factors. Despite significant regulation as a food producer and years of food safety citations and positive listeria tests going back to 2013, no serious board action was taken until early 2015. No board meeting provably featured discussion of the food safety or listeria results, no board committee was established to oversee food safety or FDA compliance, and the board failed to adequately obtain information from management, who knew about the growing number of red flags. Given that Blue Bell was entirely dependent on one food product, ice cream, the court found the board’s complete failure to monitor food safety could constitute bad faith, sufficient to allow the case to proceed to discovery and potentially trial.

Most corporations will not face a situation as dire as Blue Bell encountered. But the message of Marchand v. Barnhill is clear for those serving on corporate boards across the country. If you want to protect yourself and your company, actively monitor the corporation’s essential operations. This can take the form of a committee dedicated to the subject, a regularly scheduled agenda item on the subject or strict enforcement of reporting rules for officers and other management. Especially for single-product corporations or those operating in heavily regulated industries such as health care, banking and food production, this institutional awareness can be the difference not only between liability and non-liability for board members but also between survival and extinction of the business as a whole.

If you have questions, Woods Fuller attorneys can help. Visit woodsfuller.com for information.

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Legal lesson: Board oversight of corporate operations is a must

Serving on a board carries responsibilities — and failures can expose board members to liabilities. Don’t let a case like this happen to your business.

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