Exploring the Outer Limits of a Corporate Officer's Fiduciary Duties - The Problem of Personal Misconduct Part 1A

Answering the pushback

The preceding issue of this newsletter discussed a new decision by Delaware Vice Chancellor Lori Will, Brola v. Lundgren,¹ which addresses the limits of fiduciary duty and the boundaries of corporate derivative actions.

Exploring the Outer Limits of a Corporate Officer's Fiduciary Duties - The Problem of Personal Misconduct Part 1

The post generated some substantial pushback over at LinkedIn. Most of the commentators disagreed with the decision’s analysis of the fiduciary duties of corporate officers, at least implicitly suggesting their view that Vice Chancellor Laster’s decision in the McDonald’s case was correctly decided. With all due deference, I disagree. I think McDonald’s was wrongly decided and that Brola got it right. But that’s a question for another day.

There was one comment, however, from Jonathan Macey that got me thinking. Macey wrote:

I agree that there can’t be a derivative lawsuit, sounding in reach of the fiduciary duty of loyalty. But what about a derivative a lawsuit to recover the damages paid out by the corporation in the underlying sexual harassment lawsuit ? Are you suggesting that a derivative lawsuit can only be brought for breaches of fiduciary duties? … Couldn’t a derivative lawsuit have been brought to recover the damages paid by the company, and wouldn’t that lawsuit have been demanded excused?

As I pondered that question, two thoughts arose. First, VC Will dismissed Brola’s complaint with prejudice. I took Civil Procedure over forty years ago and have never had occasion to become versed in Delaware Chancery Court procedure, so I cannot speak to the issue of whether the complaint should have been dismissed with or without prejudice. I also cannot speak to the question of what effect dismissal of the complaint has going forward. Can Brola refile a complaint alleging a different legal theory?² I welcome comments from readers.

I raise that issue because my second thought had to do with an alternative theory of the case, which would provide an affirmative answer to Jonathan’s question.