Skip to main content

Court of Chancery Accepts, “With Trepidation,” at Motion to Dismiss Stage, a “Novel Theory” of Liability for Directors—Garfield

M&A/PE Briefing | June 6, 2022

In Garfield v. Allen (May 24, 2022), the Delaware Court of Chancery accepted, “with admitted trepidation,” what it called a “novel theory” advanced by the plaintiff—namely, that a corporation’s directors may have breached their fiduciary duties to the stockholders by failing to reverse equity compensation awards made to the CEO after the board became aware, via the plaintiff’s litigation demand letter, that the awards violated a limitation set forth in the company’s equity compensation plan. The court accepted, at the pleading stage, the plaintiff’s “novel” theory that a board’s failure to act to address a problem it learns of through a litigation demand letter may constitute a breach of the directors’ fiduciary duties. The court declined to dismiss the plaintiff’s fiduciary claims (as well as certain contractual claims) against the directors who approved the awards; against the other directors (who did not approve the awards); and against the CEO who received the award. While the opinion strongly suggests that the theory should be applied in a limited factual context, it remains to be seen how the theory will evolve in future cases. In the attached Briefing, we discuss the decision and offer related practice points.

Additional information

icon View File

This communication is for general information only. It is not intended, nor should it be relied upon, as legal advice. In some jurisdictions, this may be considered attorney advertising. Please refer to the firm’s data policy page for further information.