USA Law and Practice Contributed by: Matt Hurd, Melissa Sawyer and Scott Crofton, Sullivan & Cromwell LLP
See 4.8 Consequences and Enforcement of Breach of Directors’ Duties and 4.9 Other Bas- es for Claims/Enforcement Against Directors/ Officers for more information about the stand- ards of review and legal implications in connec - tion with fiduciary duty breaches. 2.2 ESG Considerations In the USA, there is a significant amount of rule - making currently underway in respect of ESG- related disclosures. Over the last few years, the Securities and Exchange Commission (SEC) has been in the process of developing prescriptive disclosure requirements related to certain ESG topics, such as climate change, human capital management and board and workforce diver - sity. Most recently, this culminated in the SEC’s adoption of new rules that would require public companies to provide certain climate-related information in their public reports, but the effec - tiveness of such rules has since been stayed due to pending legal challenges. In the absence of such prescriptive requirements, ESG matters are subject to the same principles-based approach and materiality standard that applies to other types of disclosure under the federal securities laws. However, despite the fact that the pace of rule - making in this area has remained relatively slow, public companies have long faced pressure to voluntarily provide ESG-related disclosures. For years, institutional investors, proxy advisory firms, stockholders and other stakeholders have called on companies to provide ESG disclosures and/or enhance their ESG practices through public statements, voting guidelines and stock - holder proposals. Stockholder proposals, in particular, generally serve as a low-cost way for stockholders to influence corporate behaviour and, since 2020, the number of stockholder pro - posals related to environmental and social mat -
close the substance of the conflict to the full board. In Delaware, the duty of loyalty also generally requires directors to make good faith efforts to oversee the corporation’s operations through the implementation and monitoring of a board-level information and reporting system designed to keep the board informed of critical risks (known as the “Caremark” duty). Delaware cases have also confirmed that the Caremark duty of oversight also applies to officers with respect to matters within their areas of oversight. Judicial Standards of Review If directors have discharged their duties of care and loyalty, their decisions will generally be protected by the presumption of the business judgement rule, pursuant to which courts will not rescind an action of the board so long as it can be attributed to any rational business pur - pose. However, if a plaintiff satisfies the burden of showing that directors failed to discharge the duty of care or the duty of loyalty (such as by showing the existence of a conflict of interest or gross negligence or bad faith on the part of directors when making such decision), the board could lose the protections of the business judge - ment rule and its actions could be subject to a higher standard of judicial scrutiny. For exam - ple, recent decisions by Delaware courts have demonstrated an increased willingness to per - mit Caremark duty of loyalty claims to survive the motion to dismiss stage when the directors’ failure to oversee critical risks rises to the level of bad faith. In certain states, including Delaware, courts will apply enhanced scrutiny to board actions under certain circumstances due to the sensitive nature of the matter at issue, such as in connection with decisions to enter into a transaction constitut - ing a change of control of the corporation or the adoption of a defensive action by the board.
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