Fiduciary Duties of Officers of the Corporation
Do corporate officers such as CEOs and CFOs have fiduciary duties to the corporation? Do senior executives owe the same responsibilities to the corporation as board members?
These questions often lie in the shadow of the board of directors’ fiduciary duties as a corporate governance issue. Many CEOs and other senior executives do not realize that they have fiduciary duties like board members. Nor do not routinely receive legal counsel on the issue. As a result, corporate officers are exposed to the heightened risk of legal liability for their actions.
Officers Have the Same Fiduciary Duties as Directors
Surprisingly, only recently have courts clearly stated that officers have the same two responsibilities as directors:
In the 2009 Gantler case, the Delaware Supreme Court explicitly held that officers owe the same responsibilities to the corporation that directors do (see Note 1).
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. 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 ofDelaware corporations, like directors, owe fiduciary duties of care anddirectors. We now explicitly so hold.(emphasis added).
While the court clarified these duties, it did not address the standard to assess whether officers have met their obligations. Gantler does not state whether officers are entitled to the same business judgment rule presumption that directors enjoy.
To date, no Delaware court has specifically held that the business judgment rule applies to officers, though that could be implied from previous cases. Whether and how the business judgment rule applies remains unresolved.
Differential Statutory Treatment of Directors and Officers (D&O)
In the 2010 case of Hampshire Group, the Delaware Chancery Court addressed the standards of conduct applicable to corporate officers when those officers benefit their superior officer and deliberately cause the company to violate the law (see Note 2).
Hampshire alleged that its CEO, Ludwig Kuttner, its CFO, Charles Clayton, and its Principal Accounting Officer, Roger Clark, breached their fiduciary duties through their involvement in several violations of corporate policy. Among the many alleged violations were:
- They approved expense reimbursements for executives of a subsidiary that should have been characterized as compensation, and
- Knowingly filed false certifications regarding the company’s financial statements and internal controls.
Referring to Gantler, the court stated:
[Officers are] expected to pursue the best interests of the company in good faith (i.e., to fulfill their duty of loyalty) and to use the amount of care that a reasonably prudent person would use in similar circumstances (i.e., to fulfill their duty of care). (emphasis added).
Even though the same standards of conduct apply to D&O, the consequences of a breach are quite different because Section 102(b)(7) of the Delaware General Corporation Law protects D&O differently. Delaware General Law Section 102(b)(7) allows the company to eliminate personal liability for directors, but not for officers.
Further, identity of standards does not mean identity of how those standards are applied. For example, under the Delaware Model Business Corporation Act Section 8.42, officers must inform a higher ranking executive or the board of directors about
- Material information regarding the corporation’s activities, and
- Any actual or likely material breach of duty by another corporate officer. The contours of these obligations are less developed than the duties of care and loyalty that apply to directors.
Officers should take the following steps to address the risks associated with their fiduciary responsibilities.
- Become familiar with their fiduciary duties, including the duty to report potential breaches of fiduciary responsibilities by other officers. Corporate officers who do not understand their duties could underestimate their liability and lead the company to engage in needless risks. As officers become more aware of their responsibilities, the relationship between D&O could affect corporate governance decisions.
- Review their duties, and whether they are fulfilling them, in transactions such as mergers and acquisitions.
- Review the corporation’s D&O liability insurance to understand the scope of coverage.
- Understand the indemnification provisions in the company’s articles of incorporation and bylaws. Consider asking the company for an indemnification agreement that matches what directors receive.
How well are attorneys advising officers about their fiduciary duties? And which attorneys should advice officers about this matter?
Note 1. Gantler v. Stephens, 965 A.2d 695, 708-09 & n.37 (Del. 2009)
Note 2. Hampshire Group, Limited v. Kuttner, et. al., C.A. No. 3607-VCS (Del. Ch. July 12, 2010)