Delaware Supreme Court Extends Fiduciary Duties to Corporate Officers -- Important Lessons for Nonprofit Corporations

In Gantler v. Stephens, Delaware Supreme Court clarified the law, making clear that corporate officers are subject to the same fiduciary duties as directors. Jack Siegel's analysis of this decision provides best practices and lessons corporate officers and directors, particularly in the nonprofit sector.

Mr. Siegel writes: The court in Gantler v. Stephens, 965 A.2d 695 (Del. 2009) [enhanced version available to lexis.com subscribers  / unenhanced version on lexisONE Free Case Law], held that the same fiduciary duties that apply to directors of a corporation also apply to its officers, although the Delaware statutory liability shield does not extend to persons other than directors. In states with similar laws, such an approach provides opportunities for attorneys general and charity regulators to pursue officers of a nonprofit corporation without necessarily being hampered by the problems that liability shields often pose. The court also implicitly rejected self-serving language in disclosure documents designed to support what the court apparently viewed as a suspect internal decision process. While the court did nothing to undercut the law surrounding the business judgment defense so often asserted by corporate boards and management, it once again made clear that merely asserting the exercise of business judgment will not protect a board or management from allegations that they breached their fiduciary duties if the complaining party can demonstrate that the board's decision either was not made as part of a good faith pursuit of a legitimate corporate interest or was not taken with due deliberation-in the court's words, "advisedly."

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Nonprofit corporations and bank holding companies have little in common. The most notable difference: Nonprofits don't have shareholders, and therefore, shareholder suits are unheard of in the nonprofit community. Yet, corporate law imposes the duties of care and loyalty on nonprofit directors. This is particularly apparent in the case of Delaware corporate law because the same corporate enabling statute applies to both business and nonprofit corporations. While Delaware is a relatively small state in terms of population, it is the center of corporate law. The decisions of its courts in corporate matters carry great weight throughout the country. For these reasons, Gantler could become a touchstone case in nonprofit corporate law in other jurisdictions.

The most notable holding in the decision is the one imposing the same duties on corporate officers as are imposed on members of a corporation's board. Although this was assumed to be the law in Delaware, the Delaware Supreme Court had never conclusively stated so.

Another notable aspect to the Delaware Supreme Court's decision is the focus on how conflicts of interest can affect the business judgment defense. The plaintiffs had argued that the defendants "had a disqualifying self-interest because they were financially motivated to maintain the status quo." The court demanded a greater showing because in every acquisition, defendants can point to director and officer self-interest in maintaining their corporate positions, but the court then detailed various conflicts that went beyond merely preserving a director's or officer's position as such. It was these conflicts that led to the court's decision that there should be a trial on the merits. [footnotes omitted]

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