February 10, 2009

Gantler v. Stephens: Bad Moon Risin’ for Corporate Officers?

John Jenkins, Calfee Halter & Griswold

Whenever the Delaware Supreme Court issues a corporate law decision, it’s almost by definition big news. However, the court’s recent decision in Gantler v. Stephens may be bigger news than most decisions, especially if you’re an officer of a Delaware corporation. [The decision is posted in the “M&A Litigation” Portal.]

And the news is bad.

As described in this summary of the Gantler decision, there are several important issues addressed in the opinion, but the one that is most salient to corporate officers is the court’s statement that while officers of Delaware corporations have the same fiduciary duties as directors of Delaware corporations, their liability exposure is different.

While most Delaware corporations have, as permitted by Section 102(b)(7) of the Delaware General Corporation Law, included provisions in their certificates of incorporation eliminating directors’ liability for damages arising out of the breach of the duty of care, those charter provisions do not extend to corporate officers.

The fact that Section 102(b)(7)’s protections do not extend to corporate officers is not a new concept, but the potentially different liability exposure that officers face has not often been used as a potential leverage point in corporate litigation. As Professor Lyman Johnson noted in a 2005 William and Mary Law Review article discussing officers’ fiduciary duties, “for the most part, officers appear not to be sued for fiduciary wrongdoing as officers.” Recently, however, there have been signs that this is beginning to change.

For example, in August 2008, the Chancery Court decided McPadden v. Sidhu, a case involving allegations of breach of fiduciary duties against directors and a corporate officer of a Delaware corporation. While the court found that the complaint did sufficiently allege that the board and the officer in question were grossly negligent and thus breached their duty of care, the court dismissed claims against the directors due to the existence of a Section 102(b)(7) provision in the corporation’s charter. However, noting that Section 102(b)(7) did not extend to officers, the court refused to dismiss the claims against the officer.

The Delaware Supreme Court’s decision in Gantler further heightens the profile of the different liability exposure that directors and officers face. As a result, it seems likely that claims against corporate officers are going to become more prevalent. The law is not well developed in this area, and since the academic literature on the topic argues for imposing broader fiduciary obligations on officers than those imposed on directors, things could get mighty interesting as plaintiffs open up a new front for corporate fiduciary litigation.