SLG Protects Directors, Officers, and Investors Facing Delaware Fiduciary Duty Litigation
When someone joins a corporate board or takes a C-suite role, they gain power and prestige. But they also gain a lot of responsibilities. If something in the business is wrong, or others suspect malfeasance is afoot, those at the top are usually the first to be targeted.
From the stockholders’ point of view, they invest their money expecting management to act in their best interests. If those in control of the corporation violate their fiduciary duties, the stockholders’ money is at risk.
At Shlansky Law Group, we have many years of experience successfully representing clients in both Delaware fiduciary duty litigation and related matters. If you are an investor trying to hold management accountable for their self-dealing, our team can help you get a positive outcome in your case. Call us today at 347.378.6990.
What Is a Fiduciary Duty in Delaware?
Under Delaware law, those who control a company owe fiduciary duties to both the company and the stockholders. A “fiduciary duty” is essentially a legal obligation of care and loyalty to the company. Fulfilling these duties requires acting in the company’s best interests rather than one’s own.
On paper, it sounds simple. In reality, business decisions are rarely so black and white. For example, a CEO might push for a merger with a larger company because they believe their company would fail otherwise. Stockholders who believe the company is financially healthy and oppose the merger might view the deal as evidence that the CEO just wants a large severance package from the acquiring business.
How Things Go Wrong: Common Triggers for Litigation
Mergers and Acquisitions (M&A) Conflicts
When a company is sold for cash, the board’s duties shift under the Revlon doctrine. This is because there is no longer a long-term best interest for company leadership to look after. Instead, the board must act to get the highest possible price for the stockholders’ benefit.
Whether the directors were able to get the “highest possible price” is often contested. For example, in many cases, the same directors who sold the company often keep their seats. The directors will say, “We were kept on for business continuity purposes.” The stockholders might respond, “You kept your seats in exchange for accepting a lowball offer.” When this disagreement arises, litigation over fiduciary duties is frequently the only way to uncover the truth.
Oversight Failures (Caremark Claims)
Caremark claims add another fiduciary duty to the list: the duty of effective oversight. If a business suffers substantial harm, such as a federal indictment or a severe data breach that harms the company and its value, stockholders can file a Caremark claim. If the stockholders are successful, the board members can be held personally liable. This is in sharp contrast to the general rule in Delaware, where there is typically no personal liability for breaches of the duty of care.
Caremark claims assert that the board either ignored clear warning signs of impending harm or failed to establish adequate reporting systems to detect it. These cases are notoriously difficult to win because they require proving that the directors acted in bad faith or consciously failed to act.
In these claims, both sides need experienced legal counsel. Stockholders need it because winning a Caremark claim requires substantial evidence for a Delaware judge to impose personal liability on the directors. Directors need legal counsel because, if found to have committed oversight failures, both their professional and personal well-being is at stake.
Steps a Business Must Take When Trouble Starts
If someone accuses your board of a breach, or if you are an investor who uncovered executive misconduct, you have to move carefully. Delaware law punishes sloppy reactions and rewards deliberate, documented processes.
Lock Down Your Documents
Implement a litigation hold immediately. The moment you suspect a lawsuit is coming, you have a legal obligation to preserve evidence. If your IT system automatically purges emails after 90 days, you have to turn that feature off.
If key records disappear because you failed to implement a hold, the judge can issue severe sanctions against you. In a close case, the court will simply assume that the deleted emails contained exactly what the plaintiff claimed they did.
Isolate the Conflict
If a board member is accused of self-dealing, they cannot participate in the internal investigation. The company usually needs to form a special litigation committee composed entirely of independent directors with no financial stake in the challenged transaction.
We frequently advise these committees. Our team can review thousands of documents, interview witnesses, and ultimately help decide if the corporation should pursue the claims.
Keep Internal Communications Clean
Board members often write emails in a panic when a crisis hits. An offhand comment to a colleague like, “This merger looks terrible for us,” can easily become the centerpiece of the plaintiff’s case. Talk to your lawyers before you write memos or send texts about the dispute. Internal investigations should be conducted under the guidance of legal counsel to ensure the findings remain protected by the attorney-client privilege.
Delaware’s Specialized Courts Require Experienced Counsel
You cannot treat a Delaware corporate dispute as a standard breach-of-contract case in the other 49 states. The environment is entirely different, and the judges expect absolute precision.
Most fiduciary duty cases are filed in the Delaware Court of Chancery. This is a court of equity, which means there are no juries and principles beyond just prior cases matter – the present facts and circumstances may require special, thoughtful treatment. The cases are decided by the Court’s Chancellor and Vice Chancellors who focus almost exclusively on Delaware business law. They know corporate law better than almost anyone else in the country, and they have zero patience for attorneys who try to teach them the basics.
Because there are no juries, you cannot rely on emotional appeals or courtroom theatrics. The judges want clean legal arguments, precise citations to precedent, and deep economic analysis.
They also move fast. A plaintiff might seek a preliminary injunction to prevent a multibillion-dollar merger from closing next week. The court will often accommodate that schedule. If you do not retain legal counsel promptly, you might find yourself being deposed and reviewing thousands of documents in a matter of days.
If you hire an attorney who does not know the unwritten rules and rapid cadence of the Chancery Court, you are walking into a trap. SLG has years of experience litigating in Delaware’s unique court system. We know the case law, the expectations, and how to build a case that holds up under intense judicial scrutiny.
Frequently Asked Questions (FAQs) About Fiduciary Duties
What are the primary fiduciary duties under Delaware law?
Delaware recognizes two main fiduciary duties: the duty of loyalty and the duty of care.
The duty of care requires directors and officers to make informed decisions. They cannot simply rubber-stamp a proposal. They have to review the documents, ask tough questions of management, consult outside experts, and take the time to carefully consider their options before voting on a major corporate action.
The duty of loyalty requires them to act in the best interest of the corporation and its stockholders, prioritizing the company over their personal financial gain.
Does the “Duty of Loyalty” only apply to stealing money or self-dealing?
No. While self-dealing is the most obvious violation, the duty of loyalty covers much more ground. It includes the absolute obligation to act in good faith.
If a director consciously ignores his oversight responsibilities, deliberately breaks the law to increase profits, or intentionally hides material information from the rest of the board or the stockholders, he violates the duty of loyalty. You don’t have to pocket company money to breach this duty. If you act with a conscious disregard for your responsibilities, Delaware courts will hold you accountable.
How does the “Business Judgment Rule” apply in fiduciary duty litigation?
The business judgment rule is the ultimate shield for corporate directors. It is a powerful legal presumption that the board acted on an informed basis, in good faith, and with the honest belief that their decision was best for the company.
If the rule applies, then Delaware courts will not play armchair director and second-guess the decision. This is true even if the decision ultimately proved to be a disaster that cost millions. The court recognizes that business involves risk, and judges do not want to manage companies from the bench.
To win a lawsuit, a plaintiff has to overcome this presumption. They must prove the directors were conflicted, acted in bad faith, or were grossly negligent in their process. If they can pierce the business judgment rule, the burden shifts to the directors to defend themselves.
Call SLG When Your Business Faces Delaware Fiduciary Duty Litigation
Directors have the power to run the business and make decisions. Stockholders own the business and have the right to know their investments are not being squandered. If you suspect a business leader has violated their fiduciary duties, you need experienced legal guidance from attorneys familiar with Delaware law and procedure. That is why so many clients have trusted SLG over the years. Call us today at 347.378.6990 to schedule a consultation.
