Delaware Opinion Extends Directors Duty To Officers

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.