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Frontpage » Delaware Opinion Extends Directors Duty To Officers


DELAWARE OPINION EXTENDS DIRECTORS DUTY TO OFFICERS



March 3, 2023

In a recent opinion, a Delaware Court of Chancery ruled that the fiduciary duty
of oversight recognized for corporate directors applies equally, and in some
instances to a greater degree, to corporate officers. Corporate directors have
the duty to ensure adequate information and reporting systems exist within the
organization, and to suitably respond to “red flags indicating wrongdoing.” In
its recent opinion, the Delaware court extended those same oversight duties to
corporate officers. Its rationale was that most corporations are not managed by
the board of directors. Officers run the business, are in a better position to
make oversight and strategy decisions, and are routinely tasked with creating,
maintaining, and overseeing internal policies and information reporting systems.
Consequently, according to the court, officers “are far more able to spot
problems than part-time directors who meet a handful of times a year.” The
ruling limited the scope of an officer’s duty to his or her area of
responsibility and called it context-driven. It specifically noted that the
board can “of course … tailor the officers’ obligations and responsibilities,”
nevertheless, a “particularly egregious red flag might require an officer to say
something even if it fell outside the officer’s domain.” The ruling clearly is
an expansion of potential liability against corporate officers, but it is
unclear how far it reaches. It reiterated the high burden to establish oversight
liability, which requires a “showing of bad faith,” meaning that an officer must
“consciously fail to make a good faith effort to establish information systems,
or the officer must consciously ignore red flags.” The Brownstein Hyatt firm
suggests that Delaware corporations reassess insurance and indemnification
policies and monitor any changes in D&O insurance coverage. It warns that the
decision may result in increased D&O insurance premiums.

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