The Delaware Court of Chancery in a recent opinion reiterated the definition of the fiduciary duty of loyalty and explained the flexibility that it has as a court of equity in fashioning a remedy for the breach of that duty. In CertiSign Holding, Inc. v. Kulikovsky, C.A. No. 12055-JRS (Del. Ch. June 7, 2018), the court addressed several issues in connection with claims and counterclaims involving a complex web of inter-related companies and business relationships. The court provides a graphic chart which described how the 12 entities involved were inter-related. Among the claims described in this 83-page opinion were breaches of the fiduciary duty of loyalty by refusing to cooperate to correct corporate records for solely personal reasons, as well as related claims.
For purposes of this short blog post, I will focus on the statements of law that will have the most wide-ranging applicability instead of focusing on the very extensive factual allegations.
Additional background facts are contained in a prior decision in this case pursuant to DGCL Section 205 in which the court entered an order validating the outstanding stock and proffered stock ledger to fix the problem arising out of the issuance of capital stock that was not properly approved. See In Re CertiSign Hldg., Inc., 2015 WL 5136226 (Del. Ch. Aug. 31, 2015).
Part of the allegations for breach of fiduciary duty of loyalty arose out of the defendant director’s refusal to agree to cooperate to correct the defect in the corporate records without the company first agreeing to grant a personal benefit to that defendant director.
Key Statements of Law:
Although well-defined and well-established, it remains helpful to review an articulation of the bedrock fiduciary duty of loyalty owed by directors of Delaware companies. The court described the duty of loyalty as follows:
- “A public policy, existing through the years . . . demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of the duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation.” Slip op. at 43. See also footnotes 183 and 184. (citing cases that found a breach of the duty of loyalty when a controlling stockholder implemented an interested transaction that was designed to protect the personal interests of the directors and was not reasonably or necessarily related to the best interests of the corporation.)
In the instant case, the court explained that the duty of loyalty was breached because the defendant director refused to cooperate with the attempt to correct the corporate records—and that refusal jeopardized the existence and operations of the company solely in order to obtain leverage to advance personal interests.
The court also explained that, as a court of equity, it has flexibility to award damages for breach of the duty of loyalty that allows the relaxation of the usual requirement of a connection between causation and the damages resulting from the breach. See Slip op. at 76 and 77. See also footnotes 274 through 277. In particular, the court explained that “concerns of equity and deterrence justify loosening normally stringent requirements of causation and damages when a breach of the duty of loyalty is shown.”
The court granted attorneys’ fees incurred by the company to correct defective records that the defendant director refused to cooperate to fix as the remedy for breach of fiduciary duty (as opposed to awarding fees for bad faith litigation, for example, which was not the basis for the award in this case). See footnote 287.