I have never been reconciled to the Delaware Supreme Court’s pronouncement in Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009) that “the fiduciary duties of officers are the same as those of directors”. Officers are, as I’ve previously noted, agents of the corporation while directors are not. This means that an officer’s duties are sourced in agency law. Professor Deborah A. DeMott forcefully makes this point in a forthcoming paper:
Making agency central to understanding officers’ positions and responsibilities helps to differentiate officers from directors. Like a director, an officer is a fiduciary, but distinctively so, not as a mere instance of a generic “corporate fiduciary” who owes duties of loyalty and care to the corporation.”
Corporate Officers as Agents, 74 Wash. & Lee L. Rev. __ (no. 2, 2017).
Understanding that officers are agents also brings into focus the often overlooked question of what law governs an officer’s performance of his or her duties. Remarkably, the Delaware Supreme Court made no mention in Gantler v. Stephens of the law of agency or the possible application of Ohio law, where the corporation was headquartered and operated a bank. In my view, the Court should have analyzed the actions of the defendants qua officers under agency law and determined under applicable choice of law principles whether to apply Delaware or Ohio law. ... Because officers typically exercise authority over corporate employees, the title of officer has come to imply authority.
First question, if officers are agents--pure and simple--why did the drafters of the Model Business Corporation Act feel it necessary to lay out both standards of conduct and standards of liability for officer? The MBCA had to do so for directors, who are fiduciaries but not agents, so as to define the directors' duties because agency law was not applicable. The decision to do so for officers therefore implies that even if officers are agents, they are a special sort of agent.
Second, even assuming that officers are mere agents--nothing more and nothing less--the Restatement tell us us that the law of the state of incorporation generally controls:
The local law of the state of incorporation will be applied to determine the existence and extent of a director's or officer's liability to the corporation, its creditors and shareholders, except where, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the parties and the transaction, in which event the local law of the other state will be applied.
Restatement (Second) of Conflict of Laws § 309 (1971). The commentary focuses on breaches of fiduciary duty:
Issues relating to the liability of the directors and officers for acts such as these can practicably be decided differently in different states. It would be practicable, for example, for a director to be held liable for a given act in one state and to be held not liable for an identical act in another state. Nevertheless, in the absence of an applicable local statute, the local law of the state of incorporation has usually been applied to determine the liability of the directors or officers for acts such as these to the corporation, its creditors and shareholders. This law has usually been applied even in a situation where it might be thought that some other state had a greater interest than the state of incorporation in the issue to be determined. The local law rule of a state other than the state of incorporation is most likely to be applied in a situation where this rule embodies an important policy of the other state and where the corporation has little contact with the state of its incorporation.
The Restatement thus tees up a case in which the forum state is not the state of incorporation. In that instance, we are told, the forum state should apply the law of the state of incorporation except in rare instances in which the forum state has an applicable rule reflecting an important local policy and the corporation has weak contacts with the state of incorporation.
In Gantler, however, Delaware was both the forum state and the state of incorporation. If someone had raised the choice of law issue, the Delaware courts presumably would have applied Delaware choice of law rules. In turn, that would have sent the court to the substantive law of Delaware, as it has a particularly strong version of the internal affairs doctrine (perhaps not surprisingly):
The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders.12 The Restatement (Second) of Conflict of Laws § 301 provides: “application of the local law of the state of incorporation will usually be supported by those choice-of-law factors favoring the need of the interstate and international systems, certainty, predictability and uniformity of result, protection of the justified expectations of the parties and ease in the application of the law to be applied.”13 Accordingly, the conflicts practice of both state and federal courts has consistently been to apply the law of the state of incorporation to “the entire gamut of internal corporate affairs.”14
67 The internal affairs doctrine is not, however, only a conflicts of law principle. Pursuant to the Fourteenth Amendment Due Process Clause, directors and officers of corporations “have a significant right ... to know what law will be applied to their actions”15 and “[s]tockholders ... have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs.”16 Under the Commerce Clause, a state “has no interest in regulating the internal affairs of foreign corporations.”17 Therefore, this Court has held that an “application of the internal affairs doctrine is mandated by constitutional principles, except in the ‘rarest situations,’ ”18 e.g., when “the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce.”19
Second, Keith is perturbed by the court's failure to deal with the choice of law issue. But (1) maybe nobody brought it up, in which case the court had no duty to do so sua sponte and (2) the result would have been a foregone conclusion in favor of applying Delaware law.
Personally, I'm okay with it.