In Gantler v. Stephens, (Del. Supr., Jan. 27, 2009), the Delaware Supreme Court has clarifed 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." Vindicating the work of Lyman Johnson and David Millon, the opinion goes on to address major issues in Delaware law, including when shareholder ratification effectively shields board action (hint: if a shareholder vote is legally required already, no go). Francis Pileggi has a great summary of the opinion here.
For too long our scholarship has focused on the board of directors, rather than on the true powerbrokers of the corporation. My article From Loyalty to Conflict, just published in the Florida Law Review, takes the idea of officer-as-fiduciary and runs with it. I argue that we need to educate officers to recognize conflicts of interest and train them in how to handle them. I suspect we scholars will be be unpacking Gantler v. Stephens for quite some time, but my initial reaction is relief that Delaware's highest court has confirmed that officers are in fact fiduciaries.
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1. Posted by francis pileggi on January 30, 2009 @ 12:04 | Permalink
thanks for the hat tip
2. Posted by AnonCorpLawyer on February 1, 2009 @ 10:07 | Permalink
The more interesting question is whether officers are protected by the business judgment rule.
3. Posted by lyman johnson on February 3, 2009 @ 13:01 | Permalink
The second commenter is right, in part. The framework used in analyzing the claims against officers did not use the BJR construct that is so awkward and unnecessary but instead cut straight to whether the allegations made out a fiduciary duty claim;the BJR was nowhere to be seen in the case against the officers. The question of its application to officers remains unsettled.
4. Posted by Len Rotman on February 3, 2009 @ 15:25 | Permalink
An important threshold issue here is that the BJR is a duty of care matter, not a fiduciary one. One cannot rely upon the BJR if a conflict of interest or duty exists. Thus, the application of the BJR assumes the absence of a breach of fiduciary duty; it does not work to defend against such a breach. The improper conflation of managerial duties of care and fiduciary duties has created a basis for misapplying the BJR to fiduciary duty claims, particularly in Delaware, as a result of Cede's fiduciary "triad" and its jurisprudential offspring.
Interestingly, whether officers hold fiduciary duties is a non-issue in Canadian corporate law, where officers are treated virtually identically to directors regarding most managerial functions.
5. Posted by lyman johnson on February 3, 2009 @ 19:07 | Permalink
The Cede framework for analyzing claims against directors has long been a doctrinal/conceptual construct of little value and, indeed, it does damage to analytical clarity in these matters. That framework, which applies to both care and loyalty claims, however, does not depend on whether care claims are "fiduciary" in character,however, both because, rightly or wrongly, Delaware regards care as fiduciary in character and because Delaware requires either a care or a loyalty basis for overcoming the presumption of the BJR. Gantler does not do so for officers--possibly a breath of fresh air from an analytical framework standpoint whatever one thinks of the substantive outcome--and the Gantler opinion discussed only the loyalty claim. Justice Jacobs may be no fan of Cede and he may have killed 2 birds with one stone here:introduced fiduciary duties for officers(while leaving a host of attendant questions unanswered) while detaching that ruling from the unnecessary BJR construct so unfortunately constructed in CEDE's BJR framework for claims against directors. The straightforward question always is whether any fiduciary--officer or director-- breached a duty. Separately, as I argued in my 2000 Business Lawyer article, The Modest Business Judgment Rule, is the
inappropriateness of looking at the substance of the business decision to decide whether care was breached;that is all the BJR does. The BJR should be elbowed aside as the key doctinal framework in favor of a straightforward inquiry into the more basic question:was an applicable duty, either care or loyalty(and whether or not care is fiduciary) breached. That inquiry need not be run through the BJR doctrine.
6. Posted by Felix Rohatyn on February 11, 2009 @ 8:56 | Permalink
Len, duty of care is a fiduciary duty. Lyman, BJR ramps up state of mind for liability for breach of duty of care to gross negligence, so elbowing BJR to the side doesn't make conceptual sense. There is a difference between breach of duty and liabiity for breach. See recent Cargill case. Other than shift to gross negligence, BJR really only has teeth in the demand context. Outside of that, it simply puts the burden on the plaintiff to show a breach, which is an unremarkable statement. Cheers.
7. Posted by Len Rotman on March 3, 2009 @ 20:34 | Permalink
In Canada, the duty of care is not the same as fiduciary duty and, indeed, doctrinally the same distinction holds true in the United States, even if Delaware has (improperly) conflated the two. I think this is what Lyman's response to my initial post indicates, although I would not want to put words in his mouth.
Fiduciary duties are about conflicts, self-dealing, utmost good faith, etc. while the duty of care is the application of the same prudent person standard as seen in tort law. On this point, see also Sean J. Griffiths, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law Jurisprudence, 55 Duke L.J. 1, 9-10 (2005).
The distinction between duties of loyalty and duties of care is clearest in the application of the business judgment rule, which has been applied to both (particuarly in Delaware), but doctrinally should apply only to the duty of care. This is made clear by Justice Brandeis in United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-4 (1917):
“[c]ourts interfere seldom to control such discretion intra vires the corporation, except where directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment.”
See also Lewis v. S.L. & E. Inc., 629 F.2d 764, 769 (2nd Cir. 1980) where it is said that “the business judgment rule presupposes that the directors have no conflict of interest. When a shareholder attacks a transaction in which the directors have an interest other than as directors of the corporation, the directors may not escape review of the merits of the transaction.”
Finally, note the comments in L.E. Mitchell, “Fairness and Trust in Corporate Law,” 43 Duke L.J. 425, 437, n. 39 (1993):
In the absence of fiduciary misconduct, courts refuse to inquire into the merits of a given business decision and to impose fiduciary liability regardless of the outcome of that decision under the doctrinal rubric of the business judgment rule. ... When misconduct is characterized as a breach of the duty of care, the business judgment rule’s presumption is overcome and liability is imposed on the fiduciary without further inquiry beyond the amount of damages. ... When the fiduciary’s misconduct is characterized as a breach of the duty of loyalty, courts do not typically impose liability on the fiduciary automatically but rather evaluate the transaction to determine whether it is fair to the corporation.
I canvass these issues in my book Fiduciary Law, (Toronto: Thomson, 2005), as well as in a new piece that I am presenting at a workshop at Duke Law School later this month (just in case you think I did all of this research simply to contest your post).
I firmly believe that once the appropriate distinctions between duties of care and loyalty are recognized and better understood, a significant part of the problems in contemporary corporate law will disappear.
8. Posted by Steven ORourke on April 9, 2010 @ 3:59 | Permalink
I applaud the analytical quality of all comments and note the key point that the DE BJR is a procedural rule providing a rebuttable presumption. We in California also appreciate DE as a source of frequent and detailed interpretation, such as not available, in quantity or quality, in CA cases.
Here is a view from the Left Coast.
IMHO, the BJR implicitly (as to structure and policy) sets the liability-protection bar for directors lower than might be expected under otherwise applicable law and lower than is applicable to officers. Because DGCL has no express enumeration of director duties, its BJR is not (as it is in many other states) expressly conditional on fulfillment of one or more expressed duties. However, I believe that the underlying policies apply in all states. I accept and support DE’s history of requiring statutory action for any broad change of corporate law, but let’s look at the interim application of Gantler.
I believe that, as a matter of policy, the BJR and other protections ought be less applicable (in any number of ways) to directors than to officers. Current policy is to encourage outside (non-officer) directors, who presumably provide disinterested oversight but who are presumably more part-time than officers and less likely to serve if charged with all of the detailed knowledge that the CEO, CFO etc have. No such policy applies to Officers, nor IMHO should it, in haec verba or par paris. The DE Supremes will have to address this.
The court expressly noted, in fn 37, that certain director-exculpation options are not applicable to officers. I note that the distinction is, in part, effected by DGCL141(e) re directors (not officers) being "fully protected in relying in good faith" upon various records, information, opinions, reports or statements by officers, committee members and certain others. These two distinctions are in accord with CA’s GCL.
The DE distinction could be (not my view) administered by some (difficult to apply) analysis of how much information a person "ought" to have had in light of his or her various positions with the company but I would prefer to see some simple dividing line that applies a tougher test to “statutory officers” (as to which, see below); or statutory clarification.
I also note that the DGCL, unlike most state codes, does not define “Officer” or any particular required officership. In most states, we can at least know that the statutorily defined officers are “Officers”. The DGCL only implicitly requires a (Chairman or President) plus (Treasurer or Secretary). Section 142(a) in light of Section 158. One cannot range far with Gantler when applied to “Officers” other than those implicitly required. It is therefore best that the Bylaws expressly define “Officers” and/or that each resolution of appointment specify whether the position is that of an “officer”. Quare whether this ought be in line with SEC Rule 3b-7 definition of executive officer.
The matter is by no means put to rest.