In midsummer 2019, the highest state court in Delaware (the home of corporate law) changed the risk landscape for these sorts of board members. In Marchand v. Barnhill (June 2019), the plaintiff-shareholder sued the board members of a large ice cream manufacturer that was the source of a deadly listeria outbreak in 2015 for breach of their fiduciary duties by failing to oversee and monitor the company’s food safety efforts. The listeria outbreak killed three consumers and sickened others; resulted in a total recall of all products, significant negative media attention, the closing of company facilities and the laying off of many employees; and ultimately led to a cash crunch that required an equity-diluting capital infusion by an outside investor. According to the plaintiff’s complaint, and further evidenced by the company’s board meeting minutes, management did not inform the board about any of these problems (including previous regulatory compliance failures) until after the recall.
The Delaware Supreme Court, which overturned the lower court’s decision, ultimately held that the plaintiff had met the very high burden required of these sorts of shareholder derivative lawsuits in finding that the board itself had taken no action to assure a monitoring and reporting system for board oversight of food safety efforts. The court noted that food safety is essential for a food manufacturer like the one implicated and pointed to the following as illustrative:
- No board committee existed that addressed food safety issues
- No protocols existed that required management to update the board on food safety compliance practices or risks
- No schedule for the board to consider on a regular basis the impact of food safety risks
- No reporting from management (until the company had become mired in the recall) about red flags regarding food safety, including complaints from regulators
- No regular discussion of food safety issues at the board level
What is to be learned from this case? First, a board risks a successful shareholder lawsuit if it simply leaves compliance and risk oversight—regarding a function as essential as food safety— entirely to management. As Marchand v. Barnhill made clear, boards of directors need to exercise oversight of compliance and monitor food safety risks, or at least to make a good faith effort to do so in order to satisfy their duty of loyalty. That good faith effort likely includes proactively implementing reporting protocols about food safety compliance and risk.
The Marchand decision represents a pivot point for boards of directors of food manufacturers and restaurant chain operators, where food safety is essential and mission critical. Careful attention needs to be given to establishing board-level oversight and meaningful reporting to the board regarding food safety efforts and concerns. While that might include appointing a board committee focused on this issue, it certainly requires an examination of whether existing reporting protocols are sufficient and, if not, establishing such protocols to permit the board to meet its duties under Marchand. We provide our clients with comprehensive advice on the risks associated with food safety and product recalls, including consulting and risk advisory programs that will best position you and your board to avoid these sorts of Marchand claims in the first place. If you have questions about or want to discuss in more detail the implications of the Marchand case, or if you are interested in a comprehensive evaluation of your food safety and product recall risk, and how to communicate that to the board in compliance with these Marchand requirements, please contact us.