21 April 2008

Delaware Upholds Officer Liability

Delaware's courts are known for their pro-management stances in corporate law. But, not always. A recent case upholding a corporate officer's inaction in setting up a system to detect corporate wrongdoing is typical of the evolving sensibility of corporate law (notably in federal bankruptcy court, rather than in chancery court).

Shareholders may be no more culpable than bondholders, and directors may be empty suits, but management is culpable and has knowledge of relevant facts. As a result, they are appropriately held liable from time to time for their wrongful acts. The 2005 bankruptcy reform similarly increased the liability of corporate management through the device of preference status for some corporate bonuses.

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