Last week, state regulators forced Silicon Valley Bank (SVB) into receivership, and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver. SVB’s failure marks the largest receivership since Washington Mutual failed in 2008 and was one of three banks that failed within the past week. While the FDIC and the Treasury Department have since stepped in to ensure that all deposits are protected, this episode is an opportunity for corporate directors and officers to reassess their current risks relating to cash management and investment policies in the current environment of economic uncertainty. Public corporations should also assess their risk factors relating to cash management policies. 

Duty of Oversight

Directors and officers both owe fiduciary duties to the corporation, which include duties of oversightand require directors and officers to manage business risks. If directors abdicate those duties, they may be subject to shareholder derivative lawsuits for breach of their fiduciary duty of risk oversight under In re Caremark Int’l.¹ Caremark itself described oversight claims as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” id., because of the strong business judgment rule that protects director decisions. 

Under the Caremark standard, suits against companies with respect to their financial investment decisions have rarely been tested; and when they have they been tested, they have been dismissed at the motion to dismiss stage. For example, in Tow v. Bulmahn, the Chapter 7 bankruptcy trustee brought suit against directors for breach of fiduciary duties,² where the directors allegedly did not exercise any oversight or supervision over the company’s various investments that were not viable and that it could not afford.³ Similarly, following the 2008 financial crisis, shareholders brought suit in In re Citigroup Inc. Shareholder Derivative Litigation, claiming that the board breached its duty to monitor by inadequately monitoring Citigroup’s exposure to the subprime lending market.⁴ In that case, shareholders questioned the directors’ oversight given the directors were “allowing” investment in subprime mortgages despite “red flags.”⁵ Both of these cases were dismissed at the pleadings stage.

More recently, however, Caremark claims have made a resurgence. In 2019, in Marchand v. Barnhill,⁶ the Delaware Supreme Court reversed the dismissal of a Caremark oversight claim against corporate directors and declared a new heightened standard: Directors now “must make a good faith effort to implement an oversight system and then monitor it.”⁷ And in In re McDonald’s Corporation Stockholder Derivative Litigation, the Delaware Court of Chancery clarified that non-director officers may be liable for failures in oversight.⁸

Cash Management Policies and Additional Risk Disclosures 

Given the shift in the legal landscape of risk oversight liability, directors and officers should anticipate Caremark oversight claims if their corporation experienced substantial losses due to its investment or deposit strategy. While it would be impossible to run a large business by spreading the corporation’s cash across enough banks to keep deposits within the $250,000 FDIC insurance limit, directors and officers should, among other things, do the following:

• Assess whether liquid deposits and investments are appropriately diversified to protect a corporation and maintain business continuity if one depository institute fails. Consider the use of a deposit placement product that spreads funds on the company’s behalf in order to keep each deposit within the insurance limit.

• In so doing, assess the risk that any particular institution in which the corporation has invested and/or deposited its liquid funds is in a sector which in turn is subject to unique market risks (e.g., cryptocurrency exposure). In the context of a bank director, oversight should include interest rate hedges and a monitoring program.

• Review their current risk factors and other disclosures to ensure that filings adequately disclose the company’s risks regarding liquidity and access to cash, and do not overstate the security of a corporation’s investment/depository strategy. See Foley & Lardner’s recent client alert on this topic here.

FOOTNOTES

¹ 698 A.2d 959, 967 (Del. Ch. 1996).

² It is important to note that once a company is close to insolvency or is insolvent, fiduciary duties may expand to include creditors.

³ CV 15-3141, 2016 WL 1722246 at *7 (E.D. La. Apr. 29, 2016).

⁴  07 CIV.9841, 2009 WL 2610746 at *5 (S.D.N.Y. Aug. 25, 2009). 

⁵ Id.

⁶ 212 A.3d 805 (Del. 2019).

⁷ 212 A.3d 805, 821 (Del. 2019). 

⁸ 2021-0324-JTL, 2023 WL 387292 at *9 (Del. Ch. Jan. 26, 2023).