January 12, 2021

Officer Liability: Recent Trends

Over the past few months, I’ve blogged about several decisions involving potential liability on the part of corporate officers.  Frequently, these cases involve situations in which corporate directors have managed to avoid liability due to exculpatory charter provisions that don’t extend to corporate officers.  This Skadden memo reviews recent trends in officer liability, and highlights the role that the lower level of protection provided to officers has played in making them increasingly attractive targets for plaintiffs. Here’s the intro:

More than a decade ago in the seminal case Gantler v. Stephens, the Delaware Supreme Court clarified that officers of Delaware corporations owe the same fiduciary duties of care and loyalty that directors owe to the corporation and its stockholders.

While directors and officers owe the same fiduciary duties, they are not entitled to the same defenses. Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permits a corporation to adopt a provision in its certificate of incorporation exculpating directors from money damages for breaches of the duty of care. Those provisions, which are routinely adopted by Delaware corporations, do not apply to corporate officers. To adequately plead a breach of the duty of loyalty, a plaintiff must show that fiduciaries acted in a self-interested manner or in bad faith, which is a high bar to meet. By contrast, to plead a breach of the duty of care, a plaintiff must allege only that the fiduciaries acted in a grossly negligent manner, a far lower bar that makes care claims a prime target for stockholder plaintiffs.

Even so, until recently, officer liability cases were still few and far between. The rare officer liability claim was typically brought in derivative litigation and involved either allegations of disloyal conduct for which neither a director nor an officer could be exculpated or conduct by an individual serving in both an officer and director role.  Claims against an officer for breach of the duty of care — particularly in class action merger litigation — were exceedingly rare.

Over the past year, however, stockholder plaintiffs have increasingly pursued claims against officers for breaches of the duty of care. Moreover, such claims have been raised not only in the derivative context but in class action merger litigation as well, with mixed results.

The news isn’t all bad for corporate officers – the memo says that while they aren’t afforded the same protections as directors under Section 102(b)(7), the Chancery Court hasn’t given plaintiffs a free pass. In order to state a claim, plaintiffs must allege not only a breach of the duty of care, but also that the individual in question was acting in their capacity as an officer and not a director. It notes that the Chancery Court has issued three recent decisions dismissing plaintiffs’ claims against officers due to the failure to adequately pled these allegations.

John Jenkins