In a post on MF Global trustee Louis Freeh's suit against Jon Corzine, Steven Davidoff and Peter Henning explain (I think correctly) that Freeh would have a hard time recovering against MF Global's directors:
Under Delaware law, where MF Global was incorporated, corporate directors cannot be sued to recover monetary damages for anything except a breach of the duty of loyalty, which usually requires showing that they gained improper benefits from their actions. To establish that directors are liable for failing to oversee the company and its risk management practices, Mr. Freeh would have to prove that “the directors demonstrated a conscious disregard for their responsibilities” and acted in bad faith.
This is an extremely high standard to meet, and Delaware courts regularly dismiss such claims. In a shareholder derivative case involving claims that Citigroup’s board failed to properly oversee the bank’s risk management before the financial crisis, for example, a Delaware court refused to find the board liable despite the bank’s near collapse and subsequent government bailout. Indeed, the court stated that under Delaware law “[t]o impose oversight liability on directors for failure to monitor ‘excessive’ risk would involve courts in conducting hindsight evaluations of decisions at the heart of the business judgment of directors.” The case against the Citigroup directors was dismissed because the plaintiffs could not show that the directors had acted in bad faith, but instead may have merely failed in their risk monitoring.
Mr. Freeh is keenly aware that Delaware law presents an almost insurmountable barrier to any suit against the directors. The board certainly looks foolhardy in trusting Mr. Corzine to take the risks that he did, but proving that they acted in bad faith would be quite difficult.
I concur. See my article on the Citigroup case, Caremark and Enterprise Risk Management (March, 18 2009). UCLA School of Law, Law-Econ Research Paper No. 09-08. Available at SSRN: http://ssrn.com/abstract=1364500:
The Caremark decision asserted that a board of directors has a duty to ensure that appropriate "information and reporting systems" are in place to provide the board and top management with "timely and accurate information." Although post-Caremark opinions and commentary have focused on law compliance programs, risk management programs do not differ in kind from the types of conduct that traditionally have been at issue inCaremark-type litigation.
Risk management failures do differ in degree from law violations or accounting irregularities. In particular, risk taking and risk management are inextricably intertwined. Efforts to hold directors accountable for risk management failures thus threaten to morph into holding directors liable for bad business outcomes. Caremark claims premised on risk management failures thus uniquely implicate the concerns that animate the business judgment rule's prohibition of judicial review of business decisions. As Caremark is the most difficult theory of liability in corporate law, risk management is the most difficult variant of Caremark claims.
But then Davidoff and Henning opine that:
.... it is much easier under the law to hold officers liable for misdeeds than it is in the case of directors.
Delaware law does not afford corporate officers the same level of protection. That means Mr. Freeh can seek to recover for a breach of the duty of due care by showing gross negligence on the part of the leaders of MF Global.
I disagree with that claim. The Delaware Supreme Court has held that:
The Court of Chancery has held, and the parties do not dispute, that corporate officers owe fiduciary duties that are identical to those owed by corporate directors.FN34 That issue—whether or not officers owe fiduciary duties identical to those of directors—has been characterized as a matter of first impression for this Court. In the past, we have implied 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. We now explicitly so hold.Gantler v.. Stephens, 965 A.2d 695, 708-709 (Del.2009). To be sure, the Court also noted that:
That does not mean, however, that the consequences of a fiduciary breach by directors or officers, respectively, would necessarily be the same. Under 8 Del. C. § 102(b)(7), a corporation may adopt a provision in its certificate of incorporation exculpating its directors from monetary liability for an adjudicated breach of their duty of care. Although legislatively possible, there currently is no statutory provision authorizing comparable exculpation of corporate officers.Id. at 709 n.37. But even so, the Court has also held that "the business judgment rule ... protect[s] corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993). So unless you think that a showing of gross negligence suffices to rebut the business judgment rule, which I don't, Delaware law likely treats directors and officers more or less the same in this context.