Fiduciary Incongruity: Open Questions Arising from Ascribing Identical Fiduciary Duties to Corporate Directors and Officers

• Publication year: 2016

Fiduciary Incongruity: Open Questions Arising from Ascribing Identical Fiduciary Duties to Corporate Directors and Officers

Darren C. Skinner

FIDUCIARY INCONGRUITY: OPEN QUESTIONS ARISING FROM ASCRIBING IDENTICAL FIDUCIARY DUTIES TO CORPORATE DIRECTORS AND OFFICERS

Darren C. Skinner^*

Introduction

In the 2009 decision of Gantler v. Stephens,¹ the Delaware Supreme Court confirmed, in what it described as a "matter of first impression" for the court, that non-director corporate officers² owe to their corporations fiduciary duties that are "identical to those of directors."³ As discussed below, there are important unanswered questions regarding this aspect of the opinion in light of the practical realities of the corporate governance role of a corporate officer. After a summary of the relevant aspects of the Gantler decision, this article will suggest and discuss a few of these open questions.

A. The Gantler Decision

Gantler involved a breach of fiduciary duty action in which the plaintiffs, who were certain shareholders of First Niles Financial, Inc. ("First Niles"), filed suit in the Delaware Court of Chancery asserting that the defendants, who were officers and directors of First Niles, violated their fiduciary duties by (i) rejecting a valuable opportunity to sell the company, (ii) deciding instead to reclassify the company's shares in order to benefit themselves, and (iii) disseminating a materially misleading proxy statement to induce shareholder approval.⁴ The defendants moved to dismiss the lawsuit, essentially arguing that the claims were legally deficient for failure to allege facts sufficient to overcome the business judgment presumption and because

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the First Niles shareholders had "ratified" the Board's decision to reclassify the First Niles shares.⁵ The Court of Chancery agreed with these arguments and dismissed the complaint. The plaintiffs appealed to the Delaware Supreme Court.⁶

The Delaware Supreme Court ultimately reversed the Court of Chancery's judgment in its entirety and remanded the proceedings.⁷ Significantly, in addressing the claim that the defendants breached their fiduciary duties to the First Niles shareholders, the Delaware Supreme Court stated:

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. The only question presented here is whether the complaint alleges sufficiently detailed acts of wrongdoing by [Management] to state a claim that they breached their fiduciary duties as officers. We conclude that it does.⁸

As discussed below, the doctrine that corporate officers owe fiduciary duties to their corporations identical to those owed by directors—which doctrine is referred to herein as "fiduciary duty equivalency"—can lead to potentially confounding and disharmonious outcomes.

B. Who Qualifies as an Officer for Purposes of Fiduciary Duty Equivalency?

Applying fiduciary duty equivalency in an effective manner necessarily requires a definition—or at least some common understanding—of who is (and is not) a corporate officer. Certainly, an individual's tenure as an employee (even a senior employee) of a corporation, does not, without more, mean that he or she is an "officer" of the corporation.⁹ Delaware's General Corporation Law statute ("DGCL") does not define the term "officer" of a corporation.¹⁰ Another Delaware statute, Section 3114(b) of the Courts and Judicial

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Procedure Code,¹¹ provides that, for purposes of that Section (which imposes constructive consent to service of process obligations on officers of Delaware corporations), the word "officer" means, in relevant part, an officer of the corporation who is the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer of the corporation.¹² As a basis for defining an officer for purposes of applying fiduciary duty equivalency, this statutory approach has the weakness of emphasizing the title of the employee rather than the substance of his or her duties. As an example, an employee of one corporation may have a job title that is not one of the "officer" titles listed in the statute while, in substance, her duties may be the same as those of an employee of a second corporation whose job title is so listed in the statute.¹³ It is clearly not appropriate for the employee of the second corporation to be subject to fiduciary duty equivalency, whereas the employee of the first corporation is not.

The judicial approach to defining a corporate officer appears to endorse the view that an employee that is performing services for a corporation is an officer of the corporation if there is an office corresponding to his or her duties provided for in the charter or bylaws of the corporation.¹⁴ This approach, while having the attraction of focusing on the substance of the employee's role rather than necessarily the employee's title, does have limitations as a rule of universal application for purposes of applying fiduciary duty equivalency. For example, each of two corporations may have an employee performing certain duties. The bylaws of the first corporation expressly designates those duties to the holder of a titled office of the corporation; whereas the second corporation's charter and bylaws make no such designation. Here, again, it would not be an appropriate outcome, simply because of the different formulations of their constitutive documents, for the first corporation's employee to be subject to fiduciary duty equivalency while the second corporation's employee is not.

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The Delaware case law and statutes do not offer any universal definition of the term "officer" for purposes of fiduciary duty equivalency.¹⁵ This should be addressed by the Delaware courts or legislature. As one academic puts it "[i]f Delaware courts decide to impose a form of officer liability, it is incumbent on the courts to specify precisely which officers are at risk for personal liability, and how they can be identified"¹⁶ and "[t]here are numerous practical difficulties with this kind of uncertainty . . . [t]he most important is that an officer would not know whether she was an officer for liability purposes until a court made that determination[;] [c]onsidering the potential dysfunction wrought by the uncertainty, this sort of arrangement is untenable in the real world of running a business."¹⁷

A solution for defining which employees of a corporation are "officers" for purposes of fiduciary duty equivalency might be some combination of the statutory and case-law approaches discussed above. Under this proposal, the Delaware courts or legislature would establish a two-pronged definition of "officer" as meaning either (i) any of the employees of a corporation holding certain types of job titles, or (ii) any employee, regardless of title, whose duties are those customarily performed by a person holding any of those job titles. A good example of this approach may be found in Rule 16a-1(f) under the Securities and Exchange Act of 1934, which reads, in relevant part, as follows:

The term "officer" shall mean an issuer's president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer.¹⁸

C. Should Directors and Officers Have Identical "Caremark Duties?"

In accordance with one branch of the fiduciary duties of directors (namely, the duty of loyalty), directors have an oversight responsibility with respect to the corporation's functioning within the law and its business performance.¹⁹ In 1996, the Delaware Court of Chancery, in Caremark International Inc.

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Derivative Litigation, held that "a director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render directors liable for losses caused by non-compliance with applicable legal standards."²⁰ Ten years later, in Stone v. Ritter,²¹ the Delaware Supreme Court affirmed the Caremark criterion for director oversight liability. In Stone, the court stated "[w]e hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention."²²

It is not immediately apparent that directors' Caremark "duty of attention"²³ can or should apply in an identical manner to officers of a corporation.²⁴ A central issue in Caremark was whether the corporation's directors exercised adequate monitoring and oversight to ensure that the corporation's officers and employees complied with federal law.²⁵ Imposing this monitoring oversight responsibility on officers would seem to disturb the familiar allocation of corporate...