Under settled Delaware law, corporate fiduciaries have an affirmative duty to ensure that corporations follow the law. Specifically, corporate directors and officers are liable for the wrongdoing of the corporation in two situations: if they consciously ignore “red flags” concerning corporate misconduct, or if they employ a business plan that prioritizes profits over legal compliance. In the terminology adopted in a recent decision by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery, the former is called the “Red-Flags Theory” of liability, as set forth in In re Caremark International Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), while the latter is called the “Massey Theory” of In re Massey Energy, 2011 WL 2176479 (Del. Ch. May 31, 2011). Both are equitable claims for breach of fiduciary duty.

Surprisingly, while these theories of liability are well established, until recently it was a question of first impression how principles of timeliness govern such claims. In December 2022, in the case of Lebanon County Employees’ Retirement Fund v. Collis, 2022 WL 17687848 (Del. Ch. Dec. 15, 2022), Vice Chancellor Laster issued a lengthy, scholarly opinion providing guidance and clarity to this murky area.

Background