SW Legal studies in Business

Shareholders Can Sue Directors for Gross Negligence in Exercise of Duties
Description Appeals court held that the shareholders of a company could sue directors for breach of fiduciary duty if they could show gross negligence by the directors in failing to prevent illegal insider trading.
Topic Business Organizations
Key Words Shareholders; Directors; Breach of Fiduciary Duty
C A S E   S U M M A R Y
Facts Shareholders sued certain directors of a corporation for breach of fiduciary duty for insider trading. The district court dismissed their suit. The appeals court reversed in part and remanded to the lower court. Here the appeals court was asked to clarify the law regarding shareholders' complaints about disregard of known risks by directors.
Decision Under Delaware law, liability on the part of a director for breach of duty to exercise appropriate attention to potentially illegal corporate activities may arise 1) from a board decision that resulted in a loss because the decision was ill-advised, or 2) from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss. Unconsidered inaction can form the basis for liability on the part of a director for breach of duty to exercise appropriate attention to potentially illegal corporate activities because, even though most corporate decisions are not subject to director attention, ordinary business decisions of officers and employees deeper in the corporation can significantly injure the corporation and make it subject to criminal sanctions. Gross negligence is the standard for measuring a director's liability for a breach of duty to exercise appropriate attention to potentially illegal corporate activities.
Citation McCall v. Scott, 250 F.3d 997 (6th Cir., 2001)

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