The Delaware Court of Chancery has held that two directors breached their duty of loyalty by failing to meet their Caremark obligations. In ATR-Kim Eng Financial Corp. v. Araneta, Araneta controlled 90% of a corporation and was one of the three directors. After a falling out with his childhood friend Arnaiz, who’s ATR owned the remaining 10%, Araneta transferred the corporation’s assets to his own children for no consideration.
Vice Chancellor Strine had no difficulty finding Araneta liable. The interesting part of the opinion concerns the other two directors, Berenguer (Araneta’s niece and the CFO) and Bonilla. They were completely overborne by Araneta and readily admitted that they did nothing as directors. It appears that no board meetings were held. Vice Chancellor Strine found that they violated their duty of loyalty by failing to implement a reporting or monitoring system as required by Caremark. It has several characteristically Strinian phrases.
Pedagogically, this case and Stone v. Ritter will probably replace Caremark (casebook pp. 410, 426-27, 443-44). Between them they show that the duty to monitor is a loyalty issue and they also discuss the standard of review. The facts of Araneta are more accessible and interesting than those of Caremark. Since Stone v. Ritter torques Caremark rather considerably, it would be hard to keep Caremark itself as a teaching case. Perhaps it will be less confusing to students if we refer to the duty to monitor as the Loyaltymark duty.
Francis Pileggi (here), Steve Bainbridge (here), and Gordon Smith (here) all have discussions of Araneta.
