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General counsel, fiduciary duties under Delaware law

by contributors William R. Spalding and John D. Hopkins | Published October 5, 2011 at 1:05 PM

Over the past decade or so, there has been a steady expansion in the roles and responsibilities assumed by general counsel. In addition to balancing potentially conflicting reporting obligations to the CEO and to the board of directors, today's general counsel often acts as an executive officer, corporate secretary, gatekeeper to the public securities markets, manager of reputational risk and strategic adviser to the CEO.

But until relatively recently, the fiduciary duties of officers of Delaware corporations, particularly general counsel, have not been well defined in the Delaware case law. There have, however, been three recent Delaware cases that make it apparent that the general counsel position has become more challenging and that may provide guidance to general counsel seeking to avoid pitfalls that could arise under Delaware law as a result of their expanded roles and responsibilities.

While most practitioners have long assumed that Delaware courts would impose the fiduciary duties of care and loyalty on officers, as they do on directors, it was only recently in Gantler v. Stephens that the Delaware Supreme Court settled this issue, in part, by explicitly holding that "officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors."

The Gantler decision turned on issues implicating the duty of loyalty obligations owed by officers and directors. The Gantler court focused on, among other things, the acts and omissions of the corporate treasurer and noted that he could be deemed to have a conflict of interest in acting to "retain his job and the benefits it generated." The Gantler court found that, by assisting the CEO in sabotaging an auction process to sell the company in favor of a management-led recapitalization and go-private transaction, the treasurer had breached his duty of loyalty. This holding could be read to be inconsistent with established Delaware precedent in director duty-of-loyalty questions, where Delaware courts have long held that a director's self-interest in maintaining his or her board position is not enough, in and of itself, to invoke duty-of-loyalty concerns and may underscore a subtle distinction in how Delaware courts will interpret the scope of an officer's duty-of-loyalty obligations in the context of superior/subordinate relationships going forward.

The Gantler decision does not reveal how the Delaware Supreme Court will interpret the scope of an officer's fiduciary duty-of-care obligations, and, in particular, whether Delaware courts will extend to officers the "gross negligence" standard that they have come to embrace for typical director duty-of-care claims. Finally, it is noteworthy that the Gantler court also observed that Section 102(b)(7) of Delaware General Corporation Law, which permits exculpation for personal liability for due-care claims, is limited on its face to directors.

Subsequently, in Hampshire Group Ltd. v. Kuttner, et al., then-Vice Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery noted the conflicting views among commentators on the question of whether officers of a Delaware corporation should be more or less exposed to liability for breach of fiduciary duty-of-care obligations than directors, but declined to address this question. The fact that the Hampshire Group court went out of its way to raise this issue may underscore the unsettled nature of the scope of an officer's duty-of-care obligations.

The Hampshire Group decision also proves instructive on the question of the scope of an officer's duty-of-loyalty obligations under Delaware law. Similar to the Gantler decision, the Hampshire Group court analyzed officer conduct in the context of a superior/subordinate relationship between the CEO, and two subordinates, the chief financial officer and the principal accounting officer, holding that the various financial misdeeds of the subordinates constituted a breach of their duties of loyalty. In addition, the Hampshire Group court found that officers, like directors, have contextual obligations as fiduciaries, including the responsibility to disclose to their superior officer or principal material information relevant to the affairs of the agency entrusted to them.

The final decision of interest on the subject of officer fiduciary duty under Delaware law is the Delaware Bankruptcy Court's decision in World Health Alternatives Inc. In the World Health decision, the court imposed Caremark oversight duties upon corporate officers and found linkage between the general counsel's duties and obligations under the Sarbanes-Oxley Act and his fiduciary duty of care under corporate law in noting that general counsels have a duty to inspect the truthfulness of a company's Securities and Exchange Commission filings under the Sarbanes-Oxley Act.

The following observations and conclusions can be made regarding the state of officer fiduciary duties under Delaware law:

Officers have fiduciary duties to the corporation. The case law has made it clear that officers, like directors, have fiduciary duties of care and loyalty to the corporation.

Scope of officer fiduciary duty-of-care remains unclear. The precise scope of an officer's duty-of-care obligation has not yet been clearly defined in Delaware case law, notwithstanding the references to officer fiduciary duty being the "same" or "similar" to director fiduciary duty in the Gantler and Hampshire Group cases. With respect to the duty of care, whether officers of Delaware corporations will be afforded a "gross negligence" or some alternative standard remains an open issue. However, what has been evident in the officer fiduciary duty case law to date is a tendency by the Delaware courts to look at the scope of an officer's duties and responsibilities. In particular, the courts have considered any duties or obligations placed upon the officer under federal or other statutory law in assessing whether the officer has satisfied his or her fiduciary duty-of-care obligations. Given that general counsel typically have the broad mandate of responsibility for "the legal affairs of the corporation" and the potential hindsight application of Caremark duties when something goes wrong, it is apparent that general counsel must be vigilant to be well informed about potential legal issues and in taking appropriate action to address them.

Impact of superior/subordinate relationship. It should be noted that Delaware courts addressing officer fiduciary duty issues have begun to show a tendency evident for some time in the director fiduciary duty case law of blurring the lines between duty of care and duty of loyalty, and this may be particularly likely where an officer's acts or omissions appear to have put the interests of a superior ahead of the corporation's best interests or where the conduct in question involves a knowing violation or failure by the officer to comply with a statutory obligations. The clear lesson is that the general counsel's client is the corporation and neither personal loyalty or allegiance to the CEO nor concern for career can be allowed to interfere with that realty.

Exculpation and indemnification. Unlike directors, officers of Delaware corporations are not entitled to exculpation from personal liability for breaches of their duty-of-care obligations. Although officers likely should be able to satisfy the requisite requirements for indemnification from their corporations for certain failures on their part to satisfy their duty-of-care obligations, it is likely to prove difficult to satisfy such indemnification standards if the claim implicates duty-of-loyalty issues.

Proactive measures. The imposition of Caremark duties on the general counsel in the World Health case, the pitfalls encountered in managing CEO relationships addressed in the Gantler and Hampshire Group cases and the duty-of-care and duty-of-loyalty issues that permeate all of the cases discussed in this article, when coupled with the various roles and responsibilities assumed by today's general counsel, confirm that the position of general counsel in the modern corporation has become more challenging. General counsel should consider the following proactive measures to discharge their Delaware law fiduciary duties: (a) due care and attention to the discharge of specific statutory duties imposed, directly or indirectly, upon general counsel, including obligations arising under the Sarbanes-Oxley Act and other federal statutes; (b) due care and attention to the discharge of their primary duty as the principal legal officer to the corporation, including management of the in-house legal department as well as selection and oversight of outside counsel; and (c) due care and attention to managing superior/subordinate relationships in a manner consistent with their duty-of-loyalty obligations to the corporation, including making sure that the board of directors has the information it needs to carry out its duties.

William R. Spalding is a partner at King & Spalding LLP and the former executive vice president, strategy and managed care, of CVS Caremark Corp. John D. Hopkins is a partner at Taylor English Duma LLP and the former executive vice president and general counsel of Jefferson Pilot Corp. and a former partner at King & Spalding. Robert J. Leclerc, an associate at King & Spalding, contributed to this article.

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