Board Oversight, Duty of Good Faith, Loyalty and Intangible Assets

Michael D. Moberly  March 4, 2010

Stone v. Ritter, In Re Caremark, and In Re Disney are three cases that emphasize the importance of and provide practical context to board/director (fiduciary responsibilities) for the oversight, management, and stewardship of company assets, with specific implications to intangible assets and intellectual property. 

Yes, these are Delaware cases, and yes, they are 2006 and 1996 decisions respectively, but they present timely and relevant issues that warrant board, director, and management team attention.  Collectively, these cases go to the very heart of the increasing number of intangible-IP asset driven (knowledge-based) businesses. That is, today, 65+% of most company’s sources of revenue, value, and building blocks for future growth and sustainability lie in – are directly related to intangible assets.

Also, these cases, among other things, bring clarity and specificity to board’s-director’s being kept apprised of and/or knowing what’s going on inside their company.  That is, the extent and parameters in which boards/directors have a good faith duty, even perhaps duty of loyalty, to ensure (company) monitoring and reporting (compliance) systems are not merely in place (on paper), but they were specifically designed and now function to routinely and properly apprise senior management and boards:

a. with timely and accurate information, that is sufficient to allow them (within their respective scope) to

b. reach informed judgements concerning a company’s compliance with law, and business performance.

In other words, today, absent specific efforts (by boards’, directors’) to ensure each of the above occurs, they may well be, (in light of the aforementioned cases – decisions), failing to satisfy their duty to be reasonably informed about the company and therefore, be held personally liable for problems that arise.

While attempting to hold directors (personally) liable for the misconduct of (company) employees, may be one of the most difficult theories in corporation law which a plaintiff might hope to prevail, it is nevertheless, essential, in today’s extraordinarily competitive, aggressive, predatorial, and ‘winner-take-all’ (global) business and transaction environment, that boards, directors, and management teams assume (accept) a more ‘hands on’ view of their stewardship, oversight, and management responsibilities relative to their company’s assets, particularly, intangible assets.

Why?, because in cases such as Stone v. Ritter, In re Caremark, and In re Disney, important and necessary information failed to reach the board because of ineffective internal (company) controls and regular monitoring of those controls.  So, what’s the significance and (potential) applicability of these cases to company boards, directors, and management/leadership teams in general?  

Most likely, its that each may/could be held (personally) liable for damages resulting from legal violations committed by employees, if there’s a failure to, (a.) implement reporting or information systems or controls, and/or (b.) regularly monitor such systems.

As noted numerous times in this blog; integral to – underlying board, director, and management team stewardship, oversight, and management (fiduciary) responsibilities is the ability to sustain (protect, preserve) control, use, ownership, and monitor the value and materiality of a company’s (intangible) assets.  If the latter does not occur, or fails, little else matters, because asset value may quick go to zero!

(Mr. Moberly adapted this blog post from the work of Rebecca Walker of Kaplan & Walker.)


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