When the Delaware Supreme Court announced Jan. 27 in Gantler v. Stephens that officers of Delaware corporations owe the same fiduciary duties of care and loyalty as directors, the news was not particularly surprising. The court's decision was consistent with dicta from prior decisions, not to mention conventional wisdom among practitioners and commentators. But while the court's ruling was clear, the decision may create, at least in the near term, uncertainty for officers regarding the interpretation and discharge of their newly confirmed fiduciary duties.

In Gantler, the plaintiffs alleged that the directors and officers of First Niles Financial Inc. breached (i) their fiduciary duties by rejecting an offer to acquire the bank; (ii) their fiduciary duty of disclosure by disseminating materially misleading information in a proxy statement in support of a company-sponsored reclassification; and (iii) their fiduciary duty of loyalty by recommending a stock reclassification proposal to privatize the bank.

In reversing the Court of Chancery's dismissal of all three counts, the court found the plaintiffs had met their burden of pleading sufficient facts necessary to rebut the deferential business judgment rule and remanded the case to the lower court, instructing it to review the claims within the rubric of the entire fairness standard. Acknowledging the court has in the past implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty but had never actually so held, the court directly confirmed that officers owe identical duties of care and loyalty. But with little developed case law explicitly addressing the officers' fiduciary duties, Gantler raises questions as to how officers' fiduciary duties will be interpreted and what will be required in the discharge of such duties.

The limited case law regarding officers' fiduciary duties is at least partly attributable to the Delaware courts' lack of automatic jurisdiction over corporate officers prior to a Delaware Code amendment in 2004. Such circumstances would suggest officers and their advisers should look to the well-developed body of law regarding directors' fiduciary duties for guidance, but until there is a clearer understanding of how "identical" the respective duties are, officers may be operating somewhat in the dark. For one, the Gantler court, while implying that officers enjoy the protections of the business judgment rule, did not explore the application of that rule to officers. Some commentators have questioned, and no Delaware court has directly addressed, whether the business judgment rule should apply as broadly to officers as to directors. In addition, Section 8.42 of the Model Business Corporation Act, which may be instructive in further refining officers' duties, recommends burdening officers with the additional obligations to inform a superior officer or the board of directors of (i) material information regarding the affairs of the corporation and (ii) any actual or probable material breach of duty by another officer. In other words, officers, to a greater degree than directors, may be under an obligation to "speak up" -- either to make sure a superior officer or the board has all relevant information regarding a proposed action or to call attention to possible breaches of fiduciary duties. Such obligations have been less developed relative to the duties of care and loyalty that apply to directors.

Gantler was also significant for officers because in deciding to apply the "entire fairness" standard to the conduct of the corporation's treasurer, the court observed he could be deemed to have a conflict of interest in acting to "retain his job and the benefits it generated" and concluded that by assisting the CEO, to whom he was implicitly beholden for job security, in sabotaging an auction process, it can be inferred he also breached his duty of loyalty. This conclusion seems somewhat at odds with Delaware's long-standing view (acknowledged in the Gantler opinion) that merely alleging that a director is motivated by concerns of job retention is insufficient to rebut the presumption under the business judgment rule. But when officers follow orders from the board or their superiors, their interests in self-preservation could always be alleged to have colored their judgment. The Gantler holding could lead future courts to hold that if officers carry out orders that are questionably against the corporation's best interests, their actions will be reviewed under the heightened scrutiny of the entire fairness standard.

Indeed, officers are likely to face unique conflicts vis-à-vis job security and the fulfillment of their fiduciary duties. Officers may be presented with difficult questions when instructed by the board or superior officer to engage in conduct that may be later alleged to be against the corporation's best interests. If they follow such orders, are their actions likely to be reviewed under the entire fairness standard, exposing them to increased risk of fending off a breach of loyalty claim? Or if they refuse to follow such orders, are they exposing themselves to employment risk? Furthermore, if Delaware courts determine that officers are burdened with the additional obligations to inform a superior officer or the board, additional questions arise as to whether an officer would need to vocally object or attempt to prevent a corporate action that the officer believes is not in the corporation's best interests. At some level, it seems officers, more so than directors, will be required to have a clear understanding of the corporation's best interests, not to mention the motivations of their superior officers and their boards, in order to both fulfill their fiduciary duties and keep their jobs. While this may be appropriate, given officers' greater intimacy with the corporation's operations and circumstances, it suggests the discharge of their fiduciary duties may be more difficult to navigate than for directors.

Another concern for officers is that while a Delaware corporation can adopt a provision in its certificate of incorporation exculpating directors for a breach of their duty of care, it cannot do the same for its officers. Although indemnification agreements can be used to protect officers in this regard, it is further evidence that the implications of fiduciary duties are different for officers and directors.

With this backdrop, part of an officer's training should include being made aware of the existence of their fiduciary duties, including, possibly, the duty to "speak up" regarding material information or potential breaches of fiduciary duties by other officers. In addition, officers should be reminded of these duties whenever the corporation is considering a material nonordinary-course transaction, and the contours of these duties should be discussed. Officers should also review and understand the indemnification provisions in the company's articles and bylaws and, if not already in place, possibly seek an indemnity agreement from the company that puts their liability on par with that of directors. Finally, a careful review of the corporation's directors and officers' insurance would also be advisable to make sure there are no lurking gaps in coverage.

Eyes will be focused on Delaware courts to see how officers' fiduciary duties will be interpreted and what differences may develop as compared with the duties of directors. And in light of the current degree of hostility leveled at financial institution executives, it will be interesting to see whether such hostility translates into derivative actions against such officers for breach of their duty of loyalty under the theory that such officers put their own interests, including compensation, which was often tied to short-term performance, ahead of the corporation's best interests. In the meantime, companies and legal advisers should act now to alert and educate corporate officers as to their fiduciary obligations and see that appropriate indemnification and insurance protections are in place.

Mark S. Lahive is a corporate partner and Andrew K. Hirsch is corporate associate in the Los Angeles Area office of Gibson, Dunn & Crutcher LLP.