September 13, 2021

Fraud on the Board: What Is It?

In recent years, several Delaware cases have addressed the “fraud on the board” concept. This Richards Layton memo attempts to get its arms around exactly what courts mean when they talk about fraud on the board as a theory of liability. Here’s the intro:

In a footnote in a two-page order issued in 2018, the Delaware Supreme Court quietly reminded corporate law practitioners that, per the 1989 case of Mills Acquisition v. Macmillan, a complaint seeking post-closing Revlon damages can survive a motion to dismiss without pleading nonexculpated breaches of fiduciary duty by a majority of directors so long as a single conflicted fiduciary deceived the entire board. See Kahn v. Stern, 183 A.3d 715 (Del. 2018).

In the three years that followed, this “fraud-on-the-board” theory of liability has received long-form discussion in at least eight published Delaware opinions and evolved into a Swiss Army knife for stockholder-plaintiffs—indeed, Delaware courts have recently applied the once-obscure theory to serve at least three distinct doctrinal ends. This article describes, at a high level, what fraud on the board is by pinpointing the various doctrinal roles it has played in three recent opinions issued by the Delaware Court of Chancery.

For more on “fraud on the board” and its use in recent officer liability cases, see the most recent issue of our Deal Lawyers newsletter.

John Jenkins