Tag: Stone v. Ritter

Delaware Imposing Same Fiduciary Duty on Officers as Directors

In Stone v. Ritter, we saw the Delaware courts imposing a duty on corporate directors to attempt to assure that a corporate information and reporting system exists, and that failure to do so may, under some circumstances, render a director liable for losses caused by the illegal conduct of employees. See The Implications of Stone v. Ritter.

In Midland Grange No. 27 Patrons of Husbandry v. Walls, 2008 WL 616239 (Del. Ch., Feb. 28, 2008) the Delaware Chancery Court was reviewing a potential breach of fiduciary by a fraternal non-profit organization. The key statement in the decision is that regardless of whether the defendants were considered officers or directors, their fiduciary duties would be the same:

Thus, regardless of whether the Officer Respondents are properly characterized as “officers” of the Grange or “directors” of the Grange, “[t]he fiduciary duties an officer owes to the corporation ‘have been assumed to be identical to those of directors.’ “ Ryan v. Giford, 935 A.2d 258, 269 (Del. Ch.2007) (quoting In re Walt Disney Co., 2004 WL 2050138, at *3 (Del. Ch. Sept. 10, 2004))

Thanks to the Delaware Corporate and Commercial Litigation Blog for pointing out the Midland Grange case: Chancery Imposes Same Fiduciary Duty on Officers as Directors

The Implications of Stone v. Ritter

In 1996, Delaware’s Court of Chancery stated in the Caremark case that a director’s duty of good faith includes a duty to attempt to assure that a corporate information and reporting system exists, and that failure to do so may, under some circumstances, render a director liable for losses caused by the illegal conduct of employees. In 2006 the Delaware Supreme Court applied and clarified the Caremark language in the case of Stone v. Ritter.

Rebecca Walker of Walkercompliance.com wrote a summary of the Implications of Stone v. Ritter on Board Oversight of a Compliance Program.

The Stone decision formalizes the discussion that appeared in Caremark regarding potential liability of directors into a holding that directors may be liable for the damages resulting from legal violations committed by employees of a corporation, if directors fail to implement a reporting or information system or controls or fail to monitor such systems. The court places this duty of directors squarely within the duty of loyalty. The decision also provides a view of those factors that the court will use in deciding whether the board oversight of the company’s compliance program was adequate to prevent liability to the directors.