Should Boards Eliminate Corporate Officer Liability for Fiduciary Duty Breaches?

Boards will need to consider whether to provide officers with a new shield to liability.

More than 35 years ago, in the case of Smith v. Van Gorkom, the Delaware Supreme Court surprised many when it held members of a board of directors financially liable for the breach of their fiduciary duty of care. This unexpected catalyst for director personal liability triggered dramatic increases in D&O insurance premiums and fears that qualified directors would resign en masse from their boards. 

In response, Delaware and most other states quickly amended their corporate laws to allow corporations to eliminate the risk of personal liability for a director’s breach of the duty of care, subject to narrow exceptions. With this, the markets calmed, and directors stayed in the boardroom. These protections recently were extended by the Delaware legislature to officers of Delaware corporations, who are subject to the same fiduciary duties of care, loyalty and good faith as the directors. However, this extension was made without the dramatic precedent that occasioned the initial adoption of the protections for directors. Delaware is therefore the most prominent jurisdiction that has taken this step, though such protections are also permissible in several other jurisdictions, including Pennsylvania.

Already a subscriber? Sign In

About the Author(s)

Doug Raymond

Doug Raymond is a partner at Faegre Drinker Biddle & Reath LLP (www.faegredrinker.com). He can be reached at douglas.raymond@faegredrinker.com.


Related Articles

Navigate the Boardroom

Sign up for the Directors & Boards weekly newsletter for the latest news, trends and analysis impacting public company boardrooms.