Gantler: Officers, Agents, and Directors

Francis Pileggi reports on what sounds like a very interesting panel at the ABA annual meeting, in which there was discussion of the Delaware Supreme Court's decision in Gantler v. Stephens, 965 A.2d 695 (Del. 2009), which 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.FN35 In the past, we have implied that officers of Delaware corporations, like directors,*709 owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.FN36 We now explicitly so hold.FN37

FN34. See, e.g., Ryan v. Gifford, 935 A.2d 258, 266 (Del.Ch.2007).

FN35. See, e.g., In re Walt Disney Co., Deriv. Litig., 2004 WL 2050138, at *3 (Del.Ch. September 10, 2004) (“To date, the fiduciary duties of officers have been assumed to be identical to those of directors.”) (citations omitted).

FN36. That officers and directors of Delaware corporations have identical fiduciary duties has long been an articulated principle of Delaware law. See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del.1939) (discussing the duty of loyalty applicable to officers and directors); Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993) (same).

FN37. 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.

I have long found this aspect of Delaware corporate law quite puzzling. In the first place, as Pileggi notes, Delaware law has no good definition of the operative term "officer."

The DGCL does not define “officer”, but Section 142(a) does allow for a corporation to have such officers as are provided for in the bylaws. Moreover, in the long-arm statute, the Delaware Code imposes personal jurisdiction over officers who hold such titles as President, CFO, etc., or one who is identified as such in SEC filings.

That's a rather large lacuna in my book.

Second, all employees of a corporation--including the top management team, among whom the officers of the corporation presumably will be found, at least in part--are agents of the corporation. Restatement (Second) of Agency § 14 C cmt. a. In turn, agents have both fiduciary duties of care and loyalty to their employer/principal. 

The correct analogy for an officer's fiduciary duty thus is not that of a director, but rather that of an agent. (This is, of course, in the absence of a statutory provision like MBCA sec. 8.42 setting out the duties of an officer expressly. The DGCL has no such provision.)

In any case, if we are to equate the fiduciary duties of directors and officers, we ought also consider whether officers should get the same sort of liability protections as directors. In my treatise, Corporation Law and Economics, for example, I argued that officers should get the benefit of the BJR:

It is reasonably well-settled that officers owe a duty of care to the corporation. It is less well-settled that officers get the benefit of the business judgment rule. Under the ALI PRINCIPLES, the rule applies to both directors and officers. [ALI Principles § 4.01.]

Judicial precedents are divided, however. [Compare Galef v. Alexander, 615 F.2d 51, 57 n.13 (2d Cir. 1980) (holding that the business judgment rule “generally applies to decisions of executive officers as well as those of directors”); FDIC v. Stahl, 854 F. Supp. 1565, 1570 n.8 (S.D. Fla. 1994) (holding that the rule “applies equally to both officers and directors”) with Platt v. Richardson, 1989 WL 159584 at *2 (M.D. Pa. 1989) (holding that the rule “applies only to directors of a corporation and not to officers.”). At least one court claims that the former view is the majority position, rejecting an argument that “the business judgment rule applies only to the conduct of corporate directors and not to the conduct of corporate officers” on grounds that it was “clearly contrary to the substantial body of corporate case law which has developed on this issue.” Selcke v. Bove, 629 N.E.2d 747, 750 (Ill. App. 1994).]
Most of the theoretical justifications for the business judgment rule extend from the boardroom to corporate officers. Many corporate decisions are made by officers, for example, who are likely to be even more risk averse than directors. Accordingly, insulation from liability may be necessary to encourage optimal levels of risk-taking by officers. Just as the board of directors is properly regarded as a production team, so is the so-called top management team. Accordingly, internal team governance may be preferable to external review. In sum, the better view is that officers are eligible for the protections of the business judgment rule.

Pileggi's post goes on (I think paraphrasing Delaware lawyer Kurt Heyman) to opine that:

The exculpation protection of DGCL Section 102(b)(7) does not apply to officers. That section allows protection for directors for claims against them for monetary liability for breaches of the duty of care (but does not cover breaches of the duty or loyalty or suits for injunctive relief). Also, DGCL Section 141(e) only protects directors from liability for “good faith reliance" on reports of managers….” However, 10 Del. C. Section 3114 (b) imposes personal jurisdiction on both directors and (since 2004) officers of Delaware corporations via implied consent.
One possible legislative change in response to Gantler is to include officers within the protection of both Sections 102(b)(7) and 141(e), although at least one school of thought argues that such a change is not necessary.

I'm pretty sure I agree with that suggestion.