CLS Blue Sky Blog

Fiduciary Accountability for Corporate Officers

On September 29, in the case of Palmer v. Reali, the U.S. District Court for the District of Delaware confronted claims that two corporate officers engaged in conduct that breached their fiduciary duties and eventually led to the bankruptcy of the corporation.[1] The defendants moved to dismiss the claims based, in part, on the contention that the business judgment rule precluded recovery. The court denied the motion, concluding that the plaintiff had alleged sufficient facts to support its claims and pointing out that the defendants failed to cite any case in which a Delaware court held that the business judgment rule applies to officers in addition to directors.[2] Indeed, the only officer-specific fiduciary duty case cited by the court was Gantler v. Stephens, in which the Delaware Supreme Court stated broadly that “the fiduciary duties of officers are the same as directors.”[3] While the District Court’s ultimate ruling did not turn on the issue, the opinion is just the latest of many to highlight the absence of case law addressing officer-specific fiduciary duties. Given the essential role of executive officers in managing a corporation’s day-to-day affairs (and especially those of public corporations), why have Delaware courts provided so little guidance?

The answer appears to be that officer-specific fiduciary duty claims are rarely brought in Delaware courts. Contemporary scholarship posits that the traditional means to enforce fiduciary duties – stockholder litigation in state court – is seldom used to hold officers accountable for their actions. Citing a variety of factors, prior scholarship concludes that officers are largely being accountable in other contexts, such as bankruptcy litigation, securities fraud litigation, and internal corporate sanctioning.[4] Indeed, Palmer v. Reali is a bankruptcy case. Fiduciary duties are, however, a creature of common law, and so it is only through litigation (primarily stockholder litigation) that courts have the opportunity to develop legal principles, resolve uncertainties, and, when necessary, adapt and refine existing law to an ever-changing business environment. In my recent article, Officer Accountability, available here, I explore the idea that officers are not the subject of breach of fiduciary duty claims in state court.

In reviewing Delaware state court opinions from 2004 to 2014, only 86 – a relatively modest number – involve breach of fiduciary duty claims against corporate officers.[5] The factual contexts in which the cases arose break down along the following lines:

Mergers & Acquisitions: 19 percent

Employer-Employee Disputes: 4 percent

General Fiduciary Breaches (e.g., stock option backdating, compensation): 77 percent[6]

The vast majority of the opinions address claims that an officer violated his or her duty of loyalty (as opposed to the duty of care). This is to be expected; duty of loyalty claims are also far more common in litigation against directors. This focus on the duty of loyalty may suggest that stockholders and their counsel feel that it is the self-interested officer, as opposed to the careless officer, that is worth pursuing. Additionally, mechanisms that shield directors from liability, such as the business judgment rule, exculpation, indemnification and insurance, undermine the utility of the duty of care in protecting stockholder interests. The view that duty of care claims are of limited value is likely spilling over into officer litigation, even though not all of these protections apply equally to officers.[7]

The breakdown of the plaintiffs in officer fiduciary duty cases is not surprising, with stockholder-instituted cases being the overwhelming majority, and creditors (with their limited ability to bring a derivative suit) making up the smallest percentage.[8] Most stockholder claims for breach of fiduciary duty will be derivative in nature. Accordingly, Chancery Court Rule 23.1 and the requirement that a stockholder show demand futility will play a central role in the majority of officer fiduciary duty cases. Looking specifically at the cases involving derivative claims and motions to dismiss based on Chancery Court Rule 23.1, the considerable rate of dismissal is consistent with scholars’ assertions that, except in cases of egregious malfeasance, the formidable procedural hurdles inherent in derivative litigation will impede officer fiduciary claims from moving forward.[9]

The most notable case addressing officer fiduciary duties during this period was Gantler v. Stephens.[10] Since Gantler, however, there has been limited further development of officer fiduciary doctrine. Today’s case law addressing officer fiduciary liability is little different than it was nearly 80 years ago, characterized by broad statements about the presence of officer fiduciary obligations with few details as to the actual contours and application of those duties.[11] A synthesis of the Delaware Chancery Court’s scant and fragmented statements on officer fiduciary conduct does provide some limited insight into where the court may be headed, if given the opportunity, in developing the law. While the standards of conduct for officers (i.e., care and loyalty) mirror those of directors, it is less clear that their conduct will be subject to the same standard of review. In addition, subsidiary duties such as oversight and disclosure are likely to be refined as Delaware courts recognize the distinct roles and responsibilities of officers within the corporate structure as compared with directors. Indeed, the current lack of guidance with respect to officers has not gone unnoticed by the courts. The Court of Chancery, for example, has acknowledged that there are still several “important and interesting questions” with respect to officers’ fiduciary duties and the appropriate standards of liability therefor.[12]

Finally, it is important to keep in mind that while claims against officers make up a small percentage of fiduciary duty litigation, corporate officers are not wholly avoiding accountability. There are several instances of plaintiffs pursuing officers in state court, but these plaintiffs point to more established avenues of legal liability, such as usurpation of corporate opportunities, state law insider trading, compensation, and improper use of corporate assets – all claims that are based on legal principles that have been well-established in the case law for decades. Moreover, other venues such as bankruptcy litigation, securities litigation, and intra-corporate sanctioning are available, and being used, to hold officers accountable.  Unfortunately, none of these alternatives provides the Delaware courts with the opportunity to further develop the fiduciary jurisprudence as applied to officers. And, perhaps more importantly, the well-recognized role of the Delaware courts in shaping fiduciary duties, best governance practices, and the expectations of corporate management is missing when it comes to corporate officers.


[1] Civ. No. 15-994-SLR (D. Del. Sept. 29, 2016).

[2] Id. at 16 n.8 (declining to address the issue). By contrast, the business judgement rule’s applicability to director action is well-established in Delaware case law.

[3] 965 A.2d 695, 708-09 (Del. 2009).

[4] See, e.g., Lyman Johnson & Robert Ricca, Reality Check on Officer Liability, 67 Bus. Law. 75, 95-97 (2011) (discussing federal bankruptcy courts as a potential venue for officer fiduciary accountability); Id. at 87 (pointing to internal regulation of officer misconduct by the board); Robert B. Thompson & Hillary A. Sale, Securities Fraud as Corporate Governance: Reflections upon Federalism, 56 Vand. L. Rev. 859, 861 (2003) (discussing officer accountability in federal securities actions); Megan W. Shaner, The (Un)Enforcement of Corporate Officers’ Duties, 48 U.C. Davis L. Rev. 271, 303-19 (2014) (discussing how the dynamic in corporate management, along with the procedural hurdles in derivative litigation, have contributed to a lack of enforcement of officers’ fiduciary duties).

[5] For comparison, in 2014 there were only nine opinions that addressed claims of officers’ breaching their fiduciary duties, while the number of opinions discussing director fiduciary duty breaches exceeded that number within the first four months of the same year. See Megan Wischmeier Shaner, Officer Accountability, 32 Ga. St. U.L. Rev. 357, 377-78 (2016).

[6] Id. at 381-82.

[7] For example, the Delaware courts have made clear that Section 102(b)(7) exculpation for breaches of the duty of care is not applicable to officers. See Gantler, 965 A.2d at 709 n.37.

[8] Shaner, supra note 5, at 383-84 .

[9] See id. at 387-88; see, e.g., Desimone v. Barrows, 924 A.2d 908, 913-14, 951 (Del. Ch. 2007) (granting the motion to dismiss because none of the board members received the challenged option grants and the plaintiff was unable to show that the board knowingly approved improperly back-dated or spring-loaded options to the officers of the corporation); In re Sanchez Energy Deriv. Litig., No. 9132-VCG, 2014 WL 6673895, at *6, *9 (Del. Ch. Nov. 25, 2014) (dismissing fiduciary claims against the officer-defendant because the stockholder failed to show that the directors were sufficiently interested and/or not independent from the officer).

[10] 965 A.2d 695, 708-09 (Del. 2009).

[11] Compare Shaner, supra note 5, at 389-92 (describing the repeated citation to the broad statement on officer duties in Gantler without further detail) with Shaner, supra note 4, at 31-33  (describing the repeated citation to the broad statements from Guth v. Loft as precedential support for the idea that officers owe fiduciary duties without further detail).

[12] See Hampshire Grp., Ltd. v. Kuttner, No. 3607-VCS, 2010 WL 2739995, at *11 (Del. Ch. July 12, 2010). In addition to the application of the business judgment rule raised by the District Court in Palmer v. Reali, the standard of liability for the duty of care, the application of Revlon and/or Unocal, and the contours of an officer’s duty of oversight and disclosure are all open issues. In contrast, areas of relative clarity include the inapplicability of Section 102(b)(7)’s exculpation to officers and the scope of personal jurisdiction over officers under Section 3114(b). See Shaner, supra note 5, at 393-94.

This post comes to us from Professor Megan Wischmeier Shaner at the University of Oklahoma College of Law. It is based on her recent paper, “Officer Accountability,” available here.

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