Fiduciary Duty of Corporate Officers

7/31/2019 Fiduciary Duty of Corporate Officers

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K U R T M . H E Y M A N

P R O C T O R H E Y M A N L L P

W I L M I N G T O N , D E L A W A R E

K H E Y M A N @ P R O C T O R H E Y M A N . C O M

Fiduciary Duties ofCorporate Officers


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Gantler v. Stephens965 A.2d 695, 708-09 & n.37 (Del. 2009)

The Court of Chancery has held, and the parties do not dispute, thatcorporate officers owe fiduciary duties that are identical to those owed bycorporate directors. That issue-whether or not officers owe fiduciary dutiesidentical to those of directors-has been characterized as a matter of firstimpression for this Court. In the past, we have implied that officersof Delaware corporations, like directors, owe fiduciary duties of

care and loyalty, and that the fiduciary duties of officers are thesame as those of directors. We now explicitly so hold.

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That does not mean, however, that the consequences of a fiduciary breach

by directors or officers, respectively, would necessarily be the same. Under8Del. C. 102(b)(7), a corporation may adopt a provision in its certificateof incorporation exculpating its directors from monetary liability for anadjudicated breach of their duty of care. Although legislatively possible,there currently is no statutory provision authorizing comparableexculpation of corporate officers.


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GantlerRaises ThreeFundamental Questions:

(1) What is an officer?

(2) What does it mean for officers to have identical

fiduciary duties to directors?

(3) What are the consequences of officers havingidentical fiduciary duties to directors, and

relatedly, are any legislative changes necessaryor advisable?


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What is an Officer?

Focusing on non-director officers, or perhaps director-officers acting solely in theircapacities as officers, since directors have a well developed body of case lawestablishing their fiduciary duties.

No definition of officer in Delaware General Corporation Law. Section 142(a)merely provides that Everycorporation organized under this chapter shall have suchofficers with such titles and duties as shall be stated in the bylaws or in a resolution of

the board of directors which is not inconsistent with the bylaws . . . . That sectionfurther provides that Officers shall be chosen in such manner and shall hold theiroffices for such terms as are prescribed by the bylaws or determined by the board ofdirectors or other governing body.

Delawares statute providing for personal jurisdiction over officers of Delawarecorporations defines officer for purposes of that section as: an officer of thecorporation who (i) is or was the president, chief executive officer, chief operating

officer, chief financial officer, chief legal officer, controller, treasurer or chiefaccounting officer of the corporation at any time during the course of conduct allegedin the action or proceeding to be wrongful, (ii) is or was identified in the corporationspublic filings with the United States Securities and Exchange Commission becausesuch person is or was 1 of the most highly compensated executive officers of thecorporation at any time during the course of conduct alleged in the action orproceeding to be wrongful, or (iii) has, by written agreement with the corporation,consented to be identified as an officer for purposes of this section.

10Del. C. 3114(b).


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What Does it Mean for Officers to HaveIdentical Fiduciary Duties to Directors?

Directors Fiduciary Duties

Care: The duty of care requires that directors inform themselvesof all material information reasonably available to them, prior tomaking a business decision. Smith v. Van Gorkom, 488 A.2d 858,872 (Del. 1985) (citation omitted). Directors must act in an informedand deliberate manner prior to making a business decision. Id. at873. Gross negligence is the standard in determining if there has beena breach of the duty of care. In re Walt Disney Co. Derivative

Litigation, 906 A.2d 27, 53 (Del. Ch. 2006).

Loyalty: Directors have an affirmative duty to protect the interestsof the corporation, but also an obligation to refrain from conduct

which would injure the corporation and its stockholders or deprivethem of profit or advantage. In short, directors must eschew anyconflict between duty and self-interest. Ivanhoe Partners v.

Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987).


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Other Duties of Directors -- DoOfficers Share These As Well?

Good Faith: To act in good faith, a director must act at all times with an honesty of purpose and in the bestinterests and welfare of the corporation.In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 755 (Del. Ch.2005), affd, 906 A.2d 27 (Del. 2006). Directors cannot consciously and intentionally disregard[ ] theirresponsibilities, [or] adopt[ ] a wedont care about the risks attitude concerning a material corporate decision.Id.at 754-55 (citingIn re Walt Disney Co. Derivative Litigation, 825 A.2d 275, 289 (Del. Ch. 2003)). The duty of goodfaith is a subset of the duty of loyalty. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del.2006).

Disclosure: Directors are obligated to disclose all material information when soliciting stockholderaction. Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992). When . . . directors disseminate information to stockholderswhen no stockholder action is sought, the fiduciary duties of care, loyalty and good faith apply.Malone v. Brincat,722 A.2d 5, 12 (Del. 1998). The duty of disclosure is an application of both the duties of care and loyalty. Pfeffer v.Redstone, 965 A.2d 676, 684 (Del. 2009).

Candor:Directors have a duty to disclose to the board material information in their possession bearing upon aboard decision, particularly where the directors have a personal interest in the outcome of the board decision. MillsAcquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989). This is an application of the duty of loyalty.

Duties in Particular Transactional Contexts (e.g., Revlon, Inc.v. MacAndrews & Forbes Holdings, Inc., 506A.2d 173 (Del. 1986) (duty to maximize price in sale of control); Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985)(duty to act reasonably in response to threat in adoption of takeover defenses)). Revlon and Unocaldutieshave been held to be applications of both the duties of care and loyalty. Malpiede v. Townson, 780 A.2d 1075, 1086(Del. 2001) (Revlon); Gilbert v. El Paso Co., 575 A.2d 1131, 1146 (Del. 1990) (Unocal).

Duties of Oversight: Directors have a duty to assure [that] a reasonable information and reporting system

exists. In re Caremark International Derivative Litigation, 698 A.2d 959, 971 (Del. Ch. 1996). The duty ofoversight is an application of the duties of care and loyalty. Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003).


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Duties of Officers

Gantler specifically refers to duties of care andloyalty.

Makes no sense to extend duties to officers where

officers are not involved in the decision (e.g.,disclosures in proxy statements, Revlon duties),although this does not rule out the possibility ofaidingand abetting liability.

There still may be room for officers to have duty ofgood faith (in carrying out duty of loyalty), duty ofcandor (duty to disclose matters to board or otherofficers), and duty of oversight.


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What Are the Consequences of Officers Having IdenticalFiduciary Duties to Directors: Are Any Legislative Changes

Necessary or Appropriate?

As noted by Gantler, Section 102(b)(7) of the Delaware General Corporation Law only permitsexculpation of liability ofdirectors for certain breaches of duty:

In addition to the matters required to be set forth in the certificate of incorporation bysubsection (a) of this section, the certificate of incorporation may also contain any or all ofthe following matters: . . .

A provision eliminating or limiting the personal liability of a director to the corporationor its stockholders for monetary damages for breach of fiduciary duty as a director,provided that such provision shall not eliminate or limit the liability of a director: (i) Forany breach of the directors duty of loyalty to the corporation or its stockholders; (ii) foracts or omissions not in good faith or which involve intentional misconduct or a knowingviolation of law; (iii) under 174 of this title; or (iv) for any transaction from which thedirector derived an improper personal benefit. No such provision shall eliminate or limitthe liability of a director for any act or omission occurring prior to the date when suchprovision becomes effective. All references in this paragraph to a director shall also bedeemed to refer (x) to a member of the governing body of a corporation which is notauthorized to issue capital stock, and (y) to such other person or persons, if any, who,pursuant to a provision of the certificate of incorporation in accordance with 141(a) ofthis title, exercise or perform any of the powers or duties otherwise conferred or imposedupon the board of directors by this title.

Only permits exculpation for monetary breaches of the duty of care (e.g., acts of gross negligence).Does not permit exculpation for monetary liability for breaches of the duty of loyalty. Also, doesnot bar suits for injunctive relief to enjoin acts that would breach any duties (including care andloyalty).


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Additionally, Section 141(e) of the Delaware General CorporationLaw only provides directors with protection of liability for good faithreliance upon corporate records or reports of officers or advisors:

A member of the board of directors, or a member ofany committee designated by the board of directors,shall, in the performance of such members duties, befully protected in relying in good faith upon the recordsof the corporation and upon such information, opinions,reports or statements presented to the corporation byany of the corporations officers or employees, orcommittees of the board of directors, or by any otherperson as to matters the member reasonably believes are

within such other persons professional or expertcompetence and who has been selected with reasonablecare by or on behalf of the corporation.


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10 Del. C. 3114(b) provides for personal jurisdiction inDelaware over both directors and (since 2004) officers ofDelaware corporations, through implied consent:

Every nonresident of this State who after January 1, 2004, accepts election orappointment as an officer of a corporation organized under the laws of this State, or whoafter such date serves in such capacity, and every resident of this State who so acceptselection or appointment or serves in such capacity and thereafter removes residence fromthis State shall, by such acceptance or by such service, be deemed thereby to haveconsented to the appointment of the registered agent of such corporation (or, if there isnone, the Secretary of State) as an agent upon whom service of process may be made inall civil actions or proceedings brought in this State, by or on behalf of, or against such

corporation, in which such officer is a necessary or proper party, or in any action orproceeding against such officer for violation of a duty in such capacity, whether or not theperson continues to serve as such officer at the time suit is commenced. Such acceptanceor service as such officer shall be a signification of the consent of such officer that anyprocess when so served shall be of the same legal force and validity as if served upon suchofficer within this State and such appointment of the registered agent (or, if there is none,the Secretary of State) shall be irrevocable. As used in this section, the word officermeans an officer of the corporation who (i) is or was the president, chief executive officer,

chief operating officer, chief financial officer, chief legal officer, controller, treasurer orchief accounting officer of the corporation at any time during the course of conductalleged in the action or proceeding to be wrongful, (ii) is or was identified in thecorporations public filings with the United States Securities and Exchange Commissionbecause such person is or was 1 of the most highly compensated executive officers of thecorporation at any time during the course of conduct alleged in the action or proceedingto be wrongful, or (iii) has, by written agreement with the corporation, consented to beidentified as an officer for purposes of this section.


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Possible Legislative Changes

Adopt a Section 102(b)(7) for officers. Currently, an exculpatory provision incharter covering officers would be invalid.

Arguably unnecessary and/or inadvisable. Section 102(b)(7) was adopted in response to theDelaware Supreme Courts decision in Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985),which sparked a crisis in the D&O insurance market by holding that directors could be heldpersonally liable for a breach of the duty of care. There were serious concerns that insurerswould no longer issue policies covering directors, and that people would refuse to serve as

directors, particularly as independent directors who were not directly involved in day-to-dayoperations. By contrast, officers are the ones who are directly involved in day-to-dayoperations, and perhaps they should be held liable if they have acted with gross negligence,particularly since claims against them in all likelihood will only be asserted by the companyitself or in a derivative suit (as opposed to a direct suit by stockholders), whereas directors maybe sued both directly and derivatively. Moreover, the Gantler case is unlikely to spark the samekind of crisis sparked byVan Gorkom, since people serving as officers are unlikely to refuse todo so based upon the possibility of liability, as the positions usually serve as their means ofemployment, whereas independent directors affected by the Van Gorkom decision would likely

be in a better position to refuse to continue to serve in such roles.

Additionally, corporations are already permitted to indemnify officers under Section 145 of theDelaware General Corporation Law unless the officer is found liable for having breached a dutyto the corporation. Given that the standard for liability is at least gross negligence (i.e., breachof the duty of care), in all likelihood there will be no liability except in cases of breach of theduty of loyalty, in which case exculpation would be unavailable in any event.


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Possible Legislative Changes

Adopt a Section 141(e) for officers.

Arguably unnecessary. If an officer reasonably relies on reports of

more junior employees or corporate advisors, it is highly unlikely thata court would find the officer to have breached a duty of care orloyalty.


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Its Tough To Be An Officer

Fiduciary Duty of Corporate Officers

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