Are Directors Liable if Their Company Violates the Law? The Practical Implications of 'Kandell'

In a case involving allegations of unusually egregious conduct by directors of a Delaware corporation, the Delaware Court of Chancery in Kandell v. Niv, C.A. No. 11812-VCG (Del. Ch. Sept. 29) (Glasscock, V.C.) found that directors of FXCM, Inc. faced a substantial likelihood of liability for demand futility purposes on a claim alleging that they knowingly allowed FXCM to engage in an illegal business practice, despite the lack of allegations suggesting that the directors were ever explicitly notified that the practice was illegal.

Background

FXCM, Inc. is a global foreign exchange (FX) trading services company that derives a majority of its revenue from providing retail trading services to individuals. Prior to 2016, FXCM maintained a policy of guaranteeing that it would not pursue claims against its customers for negative equity on their accounts—i.e., any losses that exceeded their initial investments—and that FXCM would instead absorb any such losses (the policy). The policy, which was allegedly responsible for a significant portion of FXCM's revenue, was embodied in FXCM's client agreements and conspicuously touted in a press release, on FXCM's website, and on social media.