Bad Investments, Not Bad Faith: Caremark Claims Have Limits

The Delaware Court of Chancery dismissed a stockholder suit claiming that directors of B. Riley Financial breached their fiduciary duties by failing to catch problems with an investment that later went bad. The suit was framed as a Caremark claim, the label Delaware uses for lawsuits arguing that a board failed to conduct oversight. The Court reaffirmed why those claims are so hard to win: a board’s oversight duty is aimed at the company’s own internal compliance and risk systems, not at policing misconduct by outside parties the company does business with, even where the company has significant money on the line. A failed investment, on its own, is not evidence of bad faith, and stockholders cannot repackage hindsight criticism of a bad bet as a breach of duty. Delaware courts scrutinize process, meaning they evaluate whether the board informed itself and had systems in place, rather than whether that process led to a good outcome.