In a recent Delaware decision relating to the embattled-and-(possibly)soon-to-be-imprisoned Martha Stewart, a Court of Chancery stated that, although in certain circumstances directors may be required to detect and deter corporate wrongdoings, directors are not required to monitor the personal lives of corporate executives, even when the personal lives or images of those executives may be closely tied to the value of the corporation.
In this case, the plaintiff, a stockholder of Martha Stewart Living Omnimedia, Inc. (“Omnimedia”), brought a derivative action against the company’s founder, Martha Stewart, and Omnimedia’s officers and directors, asserting breach of fiduciary duty to Omnimedia and its stockholders by “failing to ensure that Stewart would not conduct her personal, financial, and legal affairs in a manner that would harm the Company, its intellectual property, or its business.” The plaintiff charged that Martha Stewart was a founder, director, majority stockholder and the CEO of Omnimedia, and that much of Omnimedia’s success was the result of Martha Stewart’s status as a “household icon, known for her advice and expertise on virtually all aspects of decorating, entertaining, and household affairs generally.” Consequently, alleged the plaintiff, the market for Omnimedia products was “uniquely tied to the personal image and reputation of its founder.”
In its ruling on the Company’s motion to dismiss, the court observed that, as a general rule, “absent cause for suspicion, there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.” The duty to monitor corporate affairs under Delaware law extends only to wrongdoing by the corporation, and not to the personal affairs of the corporate officers or directors. The court explained that it would be “patently unreasonable” and impracticable to expect a board, as an exercise of its supervision of the company, to monitor the personal affairs of officers and directors.
Please do not hesitate to contact us if you have any questions about a director’s fiduciary duty to the corporation and its stockholders to adequately monitor the corporation’s affairs.