February 24, 2021

Director Liability: Directors’ Duties are Fiduciary, Not Contractual

Corporate charter documents are often referred to as involving a “contract” between stockholders, the company and its directors, but a recent Chancery Court decision says that an alleged violation of a charter provision alone isn’t sufficient to support a breach of contract claim against directors.

In Lacey v. Mota-Velasco, (Del. Ch.; 2/21), Vice Chancellor Glasscock dismissed derivative claims premised on allegations that Southern Copper Corp. board’s non-compliance with charter provisions requiring independent committee approval of related party transactions breached contractual obligations owed to the company and its stockholders. This excerpt from a recent Potter Anderson blog summarizes the Vice Chancellor’s decision:

In rejecting Plaintiff’s theory that the Director Defendants can be liable to Southern Copper itself for breach of contract stemming from the failure to abide by the Southern Copper certificate of incorporation, the Court examined the contractual relationships created by a certificate of incorporation. The Court explained that certificates of incorporation are generally viewed as an agreement among stockholders, the corporation and the corporation’s directors, which conceptually supports direct suits by stockholders against the corporation based on a breach of the certificate of incorporation.

Here, Plaintiff is bringing suit on behalf of Southern Copper for breach of contract against the Director Defendants for allowing Southern Copper to violate a provision of its certificate of incorporation. The Court held that the Director Defendants are not counterparties to Southern Copper with respect to the contractual nexus that is the certificate of incorporation, the bylaws and the DGCL. The Court concluded that Southern Copper did not have a claim against the Director Defendants for breach of contract, directly or indirectly, and that “directors are not subject to a contract simply because it binds the corporation.”

The Vice Chancellor concluded that “the relationship between directors and their corporation is typically fiduciary, rather than contractual,” and that only a breach of fiduciary duty claim could be asserted against the directors for alleged violations of the provisions of the certificate of incorporation.

Check out Keith Bishop’s blog on this case & the links he provides to a couple of his earlier blogs that address the status of charter documents as contracts under California law.

John Jenkins