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Delaware Court Raises Bar on Director Liability

Jaclyn Jaeger | October 23, 2012

For years, Delaware courts have set a high bar for shareholders to win cases that allege a breach of oversight duties by corporate directors. With a recent decision, the Delaware Chancery Court upheld that idea.

The Delaware Chancery Court ruled September 25 in South v. Baker that a derivative suit by shareholders could be dismissed if the plaintiffs do not demonstrate that they are acting with authority on behalf of the company.

The decision, authored by Vice Chancellor Travis Laster, found that any shareholder who hastily files a Caremark claim and without first conducting a review of the company's books and records will be presumed by the court as having “acted disloyally and served, instead, the interests of the law firm who filed suit.” As a result, any such complaint will be at risk of being dismissed with prejudice, as South v. Brown was.

The downside for companies and boards is that it could encourage an increase in demands for...

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