Forwarding two posts by Priya Cherian Huskins, Esq of Woodruff Sawyer: Delaware Supreme Court in Marchand discusses board-level monitoring, and director independence

I am forwarding two posts by Priya Cherian Huskins, Esq. of Woodruff Sawyer – Ms. Huskins’ posts highlight recent Delaware Supreme Court holdings in  Marchand which are or should be important considerations for all boards and board committees.

In the post immediately below (click the link) Ms. Huskins discusses the court’s holding that the board (and its committees) must have monitoring processes in place. As an example, whereas it is a management responsibility to design, implement, monitor, and update risk management (or ERM) and compliance processes, and it is often said that it is the responsibility of the board (or of a committee of the board in conjunction with the board) to oversee that management has done so (i.e., a duty to oversee), Marchand makes it clear that the board/board committee oversight responsibility is an active and diligent oversight responsibility and that the board/board committee must also itself have oversight processes in place – both management and the board/board committee must design, implement, monitor and update processes to satisfy their different responsibilities, and the board/board committee can be found to be in breach of its oversight responsibilities if it fails to do so.

Here is the link to Ms. Huskins’ post pertaining to Marchand and board/board committee oversight and monitoring processes: Delaware Supreme Court Underscores the Importance of Board-Level Monitoring in Marchand (Duty of Loyalty) https://woodruffsawyer.com/do-notebook/board-level-monitoring/

In the second post (click the link below) Ms. Huskins discusses the holding in Marchand pertaining to director independence, and as I often refer to independence as situational independence. You might be aware that whether or not a director is independent in a particular situation can be extremely important as it can impact whether or not the board/board committee has properly performed its responsibilities, the burden of proof or standard that will apply in evaluating whether or not the board/board committee has performed its responsibilities, whether or not the business judgment rule will or might apply, and whether or not the action, decision or vote by the board/board committee in the particular circumstance is valid and enforceable.

The issue of independence is determined by the court on a legal and factual basis depending on the law, facts and admissible evidence in the particular situation. For example, as you might be aware (and you should be aware), when evaluating whether a director is sufficiently independent from the CEO for the purpose of that director making a decision pertaining to that CEO, or when evaluating whether a director is sufficiently independent for the purpose of making a decision pertaining to a control or M&A transaction, or whether a director is sufficiently independent when making a decision pertaining to an evaluation or investigation pertaining to the actions of or an accusation against an executive officer, the courts do in fact also look at not only the direct and extended family relationships and connections between the director and the person(s) involved in or benefiting from the transaction, but also variously can consider their direct and indirect social and business groups, clubs, friends and activities; the co-ownership of assets; and whether the director might feel hesitant to act with independence for any particular reason including, for example, the importance of that directorship to the director, the extent to which the director and the other person(s) have children in the same schools or school classes together, spousal and significant other connections, and other similar relationships and connections, etc.

You get the point – whereas not too many years ago, whether or not a director is sufficiently situational independent was a much less potentially complicated evaluation and issue, those times have changed and are now long gone. Here is the link to Ms. Huskins’ post pertaining to Marchand and the evaluation of director independence: Delaware Supreme Court Further Clarifies Its View of Director Independence in Marchand https://woodruffsawyer.com/do-notebook/delaware-supreme-court-marchand-director-independence/?utm_source=newsletter&utm_medium=email&utm_campaign=blog-management-liability

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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When should you take your internal accounting error/mistake or irregularity/fraud investigation outside?

Most every audit committee member, in-house counsel, other board member, CEO, CFO, risk officer, and chief internal auditor will at some time consider whether an accounting related investigation that is being done internally should be taken outside. The decision to stay inside or to go outside isn’t necessarily clear, and there certainly could be differing opinions depending on the facts and circumstances of the situation. The following isn’t a formal or legal discussion, but below are at least some of the factors that I would consider and that you might consider. Every situation is different at least to some extent.

  1. Is there really the expertise in-house to do the investigation? This is an important consideration that I will have more to say about in other posts – however, consider whether it is important for the primary investigator to not only have a legal background in the subject matter, but also accounting or auditing backgrounds. Whereas an accounting or auditing firm might also be retained to assist with the investigation, you might well also find that it would be helpful for the primary investigator to be able to understand the accounting, internal control and auditing or auditor issues, and that the primary investigator might need those backgrounds to better lead the investigation and make decisions or evaluations.
  2. Is there really the time availability to handle the investigation in-house?
  3. Is the dollar amount involved sufficiently large to warrant going outside for the investigation?
  4. Are the qualitative natures of the issues sufficiently important to warrant going outside, such as because of possible public relations, ethics, fraud, or other considerations?
  5. Does it warrant going outside because of the possible people who might be interviewed, questioned or involved including their office or stature in the organization, and their relationships with the people who are investigating, the board, the audit committee, the executive officers and other people?
  6. For whatever reasons, is it warranted or required that the investigation be independent, or more independent in nature.
  7. If the initial investigation began in-house (which is entirely possible), has it for whatever reason now become more prudent to go outside?

That’s it for now. Just some thoughts. I’m sure that you can come up with additional thoughts – the above discussion isn’t all encompassing.

Dave Tate, Esq. (San Francisco and California)

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Audit Committee 5 Lines of Defense 07182016

tates-excellent-audit-committee-guide-10202016-final-with-appendix-a

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