Caremark Week: Teligent's Collapse (Part One)

A case study in regulatory oversight failure

In my Advanced Corporation Law course last week, we tackled the Caremark doctrine. Coincidentally, last week Chancery Daily called her readers attention to a noteworthy decision by Chancellor Kathaleen McCormick, Giuliano v. Grenfell-Gardner (Del. Ch. Sept. 2, 2025).

I want to give a quick shoutout of gratitude to Joel Friedlander—one of Delaware’s preeminent trial lawyers—for very kindly guest lecturing last week to discuss Caremark and, in particular, the Boeing case he so ably litigated. It was a masterful presentation.

The new Giuliano decision presents a stark illustration of board oversight failure in a heavily regulated industry. Chancellor McCormick’s decision offers important lessons about directors’ and officers’ Caremark-based duties to monitor mission-critical compliance risks—and what happens when those duties are ignored.

We have touched on Caremark previously. But a brief recap may nevertheless be helpful.

Exploring the Outer Limits of a Corporate Officer's Fiduciary Duties - The Problem of Personal Misconduct Part 2

In Caremark Int’l Inc. Deriv. Litig.,¹ Delaware Chancellor Allen opined that “a director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.”

Even though Caremark was dicta and arguably inconsistent with supreme court precedent, it quickly became well accepted by the chancery court as good law² and, in Stone v. Ritter,³ was accepted by the Delaware Supreme Court as stating “the necessary conditions for assessing director oversight liability.” Stone explained that, “in the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions to assure a reasonable information and reporting system exists and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.” In other words, “with an effective compliance system in place, corporate directors are entitled to believe that, unless red flags surface, corporate officers and employees are exercising their delegated corporate powers in the best interest of the corporation.”⁴ These red flags, moreover, must either be “waved in [the board’s] face or displayed so that they are visible to the careful observer.”⁵

“That framing has led to oversight claims being called either a prong-one Caremark claim or a prong-two Caremark claim.”⁶

A plaintiff typically pleads a prong-one Caremark claim by alleging that the board lacked the requisite information systems and controls. Using more functional terminology, that species of claim can be called an “Information-Systems Claim” or an “Information-Systems Theory.” A plaintiff typically pleads a prong-two Caremark claim by alleging that the board’s information systems generated red flags indicating wrongdoing and that the directors failed to respond. From a functional perspective, the second type of claim can be called a “Red-Flags Claim” or a “Red-Flags Theory.”

The Factual Background: A Compliance Catastrophe

Teligent was a New Jersey-based generic pharmaceutical manufacturer specializing in topical creams and injectable drugs. For such a company, FDA compliance wasn’t merely important—it was existential. Without FDA approval of its Abbreviated New Drug Applications (ANDAs), Teligent couldn’t manufacture products. No products meant no revenue.

Yet despite this mission-critical dependence on regulatory compliance, Teligent’s Board of Directors established no committee to oversee FDA compliance. The Audit Committee focused exclusively on SEC compliance, never addressing FDA regulations across 30 meetings between 2017 and 2021. The Board implemented no reporting system requiring management to keep directors informed of regulatory risks.

The consequences were predictable and catastrophic. Between 2016 and 2021, the FDA issued:

• Four Form 483 letters citing manufacturing violations

• Four follow-up letters

• One warning letter declaring Teligent’s products “adulterated”

The violations escalated each year. By 2019, the FDA classified Teligent’s main facility as in “official action indicated” status—meaning “unacceptable” compliance—and warned the agency “may withhold approval of any pending applications.”

Internal emails revealed the scope of the disaster. In April 2019, CEO Jason Grenfell-Gardner wanted a drug compounding area “condemned” and suggested drywalling it off so FDA inspectors wouldn’t see it. His facilities manager agreed: “We don’t have enough lipstick for that pig.”

Employees lacked basic training on FDA regulations. In May 2019, Teligent’s VP of Quality requested pocket guides on Current Good Manufacturing Practice (CGMP) regulations, noting some employees “had never seen [the CGMP regulation] book.” A training manager lamented she’d “been rebuffed about the need for thorough training” and called it “a battle that I have fought and lost.”

By October 2021, six weeks after receiving its fifth FDA letter, Teligent filed for Chapter 11 bankruptcy.⁷