Corporate Governance

: The Race to the Bottom

Fiduciary Duties of Officers and Directors: Gantler v. Stephens (Fiduciary Duties of Directors)(Part 4)

By J. Robert Brown (index)

We are examining the recent decision by the Delaware Supreme Court in Gantler v. Stephens.

One area where the Court clarified the law in relatively unequivocal terms was to hold that officers had fiduciary duties and the duties were the same as directors.

• That issue?whether or not officers owe fiduciary duties identical to those of directors?has been characterized as a matter of first impression for this Court. In the past, we have implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.  We now explicitly so hold.

The extension of the duties clarified but did not make new law.  What was far more difficult to understand was the application of the standard.  The Court had little difficulty finding that the complaint sustained a claim against the CEO.  The same facts that established that the CEO potentially violated the duty of loyalty as a director applied with equal force to the behavior as CEO.  Less coherent was the analysis when applied to the Treasurer, Safarek. 

Safarek was essentially alleged to have participated in the effort to sabotage the due diligence process.  As the Court described:  "The complaint alleges that Safarek never responded to Cortland’s due
diligence requests and that as a result, Cortland withdrew a competitive bid for First Niles."  It was enough, apparently, on a motion to dismiss, that he engage in the behavior and was under the control of the CEO.  It was not necessary, apparently, to allege that he actually knew he was breaching his duty of loyalty.  As the Court concluded:

• It also is reasonably inferable that Safarek aided and abetted Stephens’ separate loyalty breach. Safarek, as First Niles’ Vice President and Treasurer, depended upon Stephen’s continued good will to retain his job and the benefits that it generated. Because Safarek was in no position to act independently of Stephens, it may be inferred that by assisting Stephens to “sabotage” the due diligence process, Safarek also breached his duty of loyalty.

The analysis suggests that it is enough to plead involvement in a breach plus control by the officer committing the breach.  When it is the CEO committing the breach, control of the other officers participating in the scheme will invariably be present.  They serve, after all, at the discretion of the CEO.  Thus the only real element that needs to be shown is that the officers participated in some meaningful way in the fiduciary duty violation. 

The breadth of the test suggests that officers will need to be more careful when following the orders of the CEO.  As a result of doing so, they may find themselves liable for breach of a fiduciary obligation and personally liable for any resulting damages.

Primary materials from the Chancery Court can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 13, 2009 (boomark / email).