Delaware Board’s Fiduciary Duty of Oversight for Foreign Operations
This bench ruling, highlighted on The Harvard Law School Corporate Governance Blog, for which I am a contributing author, addressed a claim for a breach of the board’s duty of oversight involving the sale of a Delaware corporation’s assets located in China, but the board allegedly was not familiar with all the particulars of the sale or the assets. The decision (which, like other transcript rulings in Delaware, can still be cited in briefs), is a useful reminder to board members of Delaware corporations who need to be especially concerned about how they fulfill their oversight duties when the corporate operations or assets may be located in far-flung countries. The court advises those directors that they will likely be expected by the court to personally visit those far-flung countries in order to comply with their obligations to have a monitoring system in place. In the words of the Chancellor:
[I]f you’re going to have a company domiciled for purposes of its relations with its investors in Delaware and the assets and operations of that company are situated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.
Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I’m not mixing up care in the sense of negligence with loyalty here, in the sense of your duty of loyalty. I’m talking about the loyalty issue of understanding that if the assets are in Russia, if they’re in Nigeria, if they’re in the Middle East, if they’re in China, that you’re not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won’t cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty. There’s no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they’re a monitor. Because the only reason to have independent directors – remember, you don’t pick them for their industry expertise. You pick them because of their independence and their ability to monitor the people who are managing the company. . .
If it’s a situation where, frankly, all the flow of information is in the language that I don’t understand, in a culture where there’s, frankly, not legal strictures or structures or ethical mores yet that may be advanced to the level where I’m comfortable? It would be very difficult if I didn’t know the language, the tools. You better be careful there. You have a duty to think. You can’t just go on this [board] and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa.
Kevin LaCroix has a characteristically insightful post here, and Bloomberg has background details here. As Kevin notes in his thoughtful post, the Chancellor commented in this bench ruling, that if a director were to resign as a form of “running away” when problems arise, instead of sticking around long enough to address them, that may itself be a breach of fiduciary duties of a director.