What Are 5 Signs Corporate Directors May Have Breached Their Fiduciary Duties?

If you are a stockholder watching a corporate board make decisions that clearly favor insiders and business leadership at the expense of the company, you may have grounds for legal action. By recognizing the early signs of corporate misconduct, you can protect your investment and hold leadership accountable. Here are 5 of the most common signs that corporate directors may have breached their fiduciary duties.

1.  Self-Dealing

Self-dealing occurs when a corporate director makes a decision that benefits her personally rather than prioritizing the best interests of the company and its stockholders. This is a direct violation of the duty of loyalty under Delaware law.

The duty of loyalty demands that a director put the corporation’s interests above her own financial or personal gain. You might notice self-dealing if a director steers a lucrative corporate contract to a secondary business she owns. Another example is when a board member purchases property that the corporation needs and then leases it back to the company at an inflated rate. When a director stands on both sides of a transaction, Delaware courts closely examine the deal’s fairness.

The burden often shifts to the director to prove the transaction was completely fair to the stockholder. If a stockholder sees leadership treating the corporate treasury as a personal bank account, she has a strong basis for pursuing a derivative claim. This type of legal action allows the stockholder to step into the corporation’s shoes and sue the director to recover the stolen funds. Identifying self-dealing early is essential to stopping a corrupt director before she drains the entity of her valuable capital.

2.  Ignoring Severe Corporate Misconduct

A director ignores misconduct when she utterly fails to implement reporting systems or consciously disregards massive red flags regarding illegal or unethical behavior. In Delaware, this is known as a Caremark claim, which points to a severe failure of oversight.

A corporate director does not have to manage daily operations, but she must establish controls to monitor major risks. If a company repeatedly faces massive fines for violating environmental laws, or if executives face persistent allegations of systemic fraud, the board must investigate. A director breaches her duty of loyalty if she knows about these massive violations and simply looks the other way. You might suspect an oversight failure if the company suddenly announces a major government investigation, yet the board has no record of ever discussing compliance in her meeting minutes.

A stockholder can hold a director personally liable when the director intentionally refuses to perform her duties. While these claims require substantial evidence, they are vital for a stockholder seeking to correct deep-rooted cultural rot within a corporation. By filing suit, a stockholder demands that leadership actually supervise the entity she was elected to oversee and prevents further financial devastation.

3.  Failing to Disclose Important Information

Board members have a duty to truthfully disclose material facts to stockholders. If directors do not do this, then stockholders cannot effectively exercise their right to vote on corporate leadership. This duty prevents directors from attempting to hide highly relevant information just because it would put their personal standing at risk.

For example, if stockholders are asked to vote on an executive compensation package, the directors must provide information that a reasonable person would consider important. Furthermore, if the directors provide misleading information, such as doctored financial projections or overinflated accomplishments and qualifications, that is also a violation.

4.  Using Corporate Assets for Personal Gain

Taking corporate assets, opportunities, or trade secrets for personal use is a classic breach of the duty of loyalty. A director cannot usurp an opportunity that rightfully belongs to the corporation.

The corporate opportunity doctrine prohibits a director from secretly taking a business deal that the company could have pursued. For example, if a director learns about a valuable patent that would perfectly complement the company’s product line, she cannot buy that patent for herself and then sell it to a competitor.

You might uncover this abuse by examining the company’s financial disclosures or demanding to inspect the corporate books and records. A stockholder who finds evidence of a director stealing assets or opportunities can bring a derivative lawsuit. This legal action forces the director to return the stolen assets or profits directly to the corporation, restoring the value of the stockholder’s investment.

5.  Approving Grossly Unfair Mergers

Directors breach their duties if they approve a merger that significantly undervalues the company or unfairly enriches others at the expense of the stockholders. Under Delaware’s Revlon standard, the board has a duty to secure the highest value reasonably available when the company undergoes a change of control. This focus on value takes precedence over grand long-term plans or other interests unrelated to current stockholders’ interests.

Frequently Asked Questions (FAQs) about Delaware Fiduciary Duty Litigation

Who can file a lawsuit for a breach of fiduciary duty in Delaware?

In most Delaware corporate litigation, you need to determine whether someone suffered a unique harm that is distinct from the harm suffered by the corporations or other shareholders. For example, if the directors refused to count a specific person’s votes but counted everyone else’s, that would constitute a unique harm to that individual. If the directors used corporate funds to enrich themselves, that is a harm suffered by the corporation.

If you are a stockholder who suffered unique harm, then you can sue directly. However, if it is the corporation itself that suffered the harm and you want to file a lawsuit to protect the corporation (known as a “derivative lawsuit”) you must have held stock when that particular harm occurred. Additionally, the stock must be held continuously throughout the lawsuit.

Does a stockholder need to own a certain amount of stock to sue?

No. Delaware law does not require stockholders to own a certain percentage of the company to bring a claim for breach of fiduciary duty. Even if you own only a single modestly priced share, the team at SLG can help you hold corporate directors accountable.

The Shlansky Law Group Helps Hold Corporate Directors Responsible

Shlansky Law Group has decades of experience representing people who want to hold corporate leadership accountable. If you believe your rights have been violated, our Delaware corporate litigation attorney team is here to help.

Contact Shlansky Law Group today at 347.378.6990 to discuss your case and explore your legal options.