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Court of Chancery Finds Directors Liable for Inaction

Posted In Directors

ATR-Kim Eng Financial Corp. v. Araneta, C.A. No. 489-N (Del. Ch. December 21, 2006).

Commentators sometimes wonder when director inattention will ever be so bad so as to warrant finding directors liable in the absence of self-dealing. This was just such a case. Briefly, the board consisted of a majority owner who picked a relative and an employee to constitute the other members of the board of directors. The Court concluded that the two non-controlling directors basically did nothing to carry out their duties to the entity and just accepted at face value everything they were told by the controlling stockholder. As a result, the Court found all the directors liable when the controlling stockholder looted the entity.

The decision is particularly interesting in that it may be an extension of the Delaware Caremark decision to no longer require a "red flag' to hold directors liable for failure to oversee the corporate entity's operations. That extension would apply when there was especially bad conduct and an utter failure by the board to meet or in any way supervise the management of the entity.

The decision was influenced by the heavy lying that the controlling stockholder did in his defense that also led to an award of attorney fees against him. Share
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