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14 Jan. 2019 | Comments (0)
On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.
Practitioners are accustomed to thinking about fiduciary claims under Delaware law by reference to the business judgment rule. A Dec. 10, 2018 decision, In re Xura, Inc. Stockholder Litigation, mentioned, in a footnote, a question about application of the business judgment rule to claims concerning fiduciary breaches by non-director officers of Delaware corporations and thus what standard applies and should apply to claims of fiduciary breaches by such officers.
Following the acquisition of Xura, Inc. by private equity firm Siris Capital Group, LLC, a Xura stockholder dissented and sought appraisal. During the course of discovery, the stockholder allegedly found evidence that Xura’s former CEO, Philippe Tartavull, breached his fiduciary duties to stockholders in connection with the sale process, and filed suit. The Delaware Court of Chancery denied Tartavull’s motion to dismiss, finding that despite stockholder approval of the transaction, the vote was not fully informed and was therefore insufficient to invoke the business judgment rule under Corwin.
In a footnote to the Xura opinion, Vice Chancellor Joseph R. Slights indicated his presumption that “the business judgment rule applies to Tartavull as CEO,” but acknowledged that “this point is not settled in our law and that there is a lively debate among members of the academy regarding whether corporate officers may avail themselves of business judgment rule protection.” Vice Chancellor Slights cited a number of law review articles suggesting, alternatively, that (i) executive conduct should be protected by the business judgment rule and (ii) executive conduct should be evaluated under a negligence paradigm based on agency principles.
In advising non-director officers about conduct that could give rise to fiduciary claims, it is certainly prudent to routinely advise that they take steps – e.g., ensuring that they act with due care, not in a conflicted context and in good faith – to meet the conditions of the business judgment rule. However, practitioners should also keep in mind that there may be a question whether officers will be entitled to business judgment rule protection, at least in certain contexts.
The Xura opinion also raises the question of what standard should be applicable to a court’s review of non-director officer conduct. There is case law indicating that the business judgment rule is the appropriate standard. For example, in the 2009 Gantler v. Stephens case, the Delaware Supreme Court acknowledged that although Section 102(b)(7) of the Delaware General Corporation Law, which allows a corporation to adopt a provision in its certificate of incorporation exculpating its directors from monetary liability for fiduciary breaches of the duty of care (but not of the duty of loyalty), does not currently apply to officers, it would be “legislatively possible” for it to do so. But if officers were not shielded from liability through the business judgment rule, and instead were subject to liability for ordinary negligence, it would make little sense to apply Section 102(b)(7) to exculpate them from liability for duty of care claims, which require a higher showing of gross negligence. Therefore, the Delaware Supreme Court’s assertion that the legislature could apply Section 102(b)(7) to officers seems to strongly suggest that the business judgment rule should be construed as applying to officers.
Moreover, in the Corwin context, if a stockholder vote on a merger is fully informed and not coerced, such a vote should, in theory, extinguish any claims against non-director officers to the same extent that it does for directors. The Delaware Supreme Court in Corwin emphasized its long-standing policy of avoiding uncertainty and judicial second-guessing after disinterested stockholders have approved a transaction, and this rationale would be undermined if claims against officers were allowed to proceed even when a majority of disinterested, fully informed and uncoerced stockholders provided their approval.
Perhaps the Delaware Supreme Court will expressly weigh in, but in the interim practitioners counseling executives should take note of the question posed by Vice Chancellor Slights’ footnote regarding the applicable standard for review of non-director officer conduct.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.
 C.A. No. 12695-VCS, 2018 WL 6498677 (Del. Ch. Dec. 10, 2018).
 Id. at 33. See also Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015) (holding that the business judgment rule applies to mergers that are not subject to entire fairness review and that are approved by a fully informed and uncoerced vote of a majority of disinterested shareholders). For a detailed discussion of the Xura case, see our blog post, Claim Against Target CEO Survives Dismissal, While Aiding and Abetting Claim Against Private Equity Buyer is Dismissed, available at https://www.clearymawatch.com/2018/12/claim-target-ceo-survives-dismissal-aiding-abetting-claim-private-equity-buyer-dismissed/.
 Xura, 2018 WL 6498677, at 30 n.113.
 965 A.2d 695, 709 n. 37 (Del. 2009).