September 2, 2025 • 24 mins
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Schulte, about a little-known element of fiduciary responsibility that could potentially have an outsized impact on director exposure: the so-called “duty of candor.” They discuss what the duty of candor is, who owes this particular fiduciary duty, how the duty of candor kicks in during a typical corporate scenario, and how a recent decision from the Delaware Chancery Court has highlighted this issue.
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SPEAKER_00 (00:00):
This episode of AHLA Speaking of Health Law is
brought to you by AHLA membersand donors like you.
For more information, visitAmericanHealthLaw.org.
SPEAKER_02 (00:17):
Welcome, everyone, to another in our continuing
series of corporate governancepodcasts.
This is Rob Gerberry.
I'm the chief legal officer ofSumma Health and the
president-elect designate of theHLA.
I'd like to welcome you to ourlatest in our continuing series
of podcasts on corporategovernance issues affecting
healthcare organizations.
Today's topic focuses on alittle-known element of
(00:38):
fiduciary responsibility thatcould potentially have an
outsized impact on directorexposure, the so-called duty of
candor.
In essence, the duty of candorrequires that a fiduciary shoots
square or be straight, I'velearned, with a person or entity
to whom or which it owes afiduciary duty.
And it's a duty that's receivedquite a bit of attention
following a recent Delawaredecision in which the judge
(01:00):
publicly shamed a businessmanfor the lack of candor he
demonstrated in dealing with hisinvestor clients.
The substantial attention paidby the vice chancellor to
fiduciary duties claims ingeneral and to claims involving
breach of duty in particularmake it a worthwhile subject for
the board of directors to partof their education.
As the leading governanceadvisor of the board, the
(01:21):
general counsel, likely teamingup with the chief governance
officer, is well situated tobrief the board on the basic
elements of the duty of candor,how it may apply to certain
types of director conduct, andhow best to prepare directors to
reduce exposure to duty ofcandor allegations.
And as always, I'm joined todayby my HLA colleague and friend,
Michael Peregrin of McDermott,Will and Schultz, who is also an
(01:44):
HLA fellow and a fellow of theAmerican College of Governance
counsel.
Michael, I think many of us arefamiliar with the duties of
care, the duties of loyalty, butit may be new for some of our
listeners to understand moreabout the separate duty of
candor.
Would you like to share more?
SPEAKER_01 (01:59):
Well, a little bit of inside baseball, Rob.
There certainly is a fiduciaryconcept related to candor, or as
some others describe it, to makefull disclosure.
You know, whether it's a coreduty unto itself or an adjunct
or subset of the duty of loyaltyis the subject of some debate
amongst the academics.
Not Not that it ultimatelymatters, I think.
(02:19):
No matter how it's positioned,the concept of candor or
shooting square, as youmentioned in your intro, as a
fiduciary obligation is prettywidely recognized.
And I kind of think of it alongthe lines of the duty of
obedience or the duty to obeythe law, which is kind of a part
of the duty of loyalty.
So it's out there.
(02:40):
And I think that's whether it'sa duty unto itself or pulled
into the duty of loyalty, I'mnot sure that matters.
The key is courts certainlyrecognize it.
SPEAKER_02 (02:50):
So Michael, what's the essence of this duty or
fiduciary responsibility?
SPEAKER_01 (02:54):
I think it's pretty simple.
And again, as you said, it's theconcept of an obligation of
fiduciary to act with honesty,shooting square, with whom or
what the fiduciary has afiduciary relationship.
It also entails an obligation tofully disclose information that
could conceivably harm thebusiness or an individual that
(03:17):
that's owed the fiduciary duty.
The way I describe it, Rob, is adirector can't pull his or her
punches when it comes toproviding information that he or
she has a reason to know thatwould be of relevance to another
director or to the company as awhole.
And circumstances pop up fromtime to time where it seems like
(03:38):
some directors might be inclinedto hold back, and that can lead
to real problems.
Now, we're going to be talkingabout this mostly in the
context, of course,corporations, but note that the
rule applies both the corporatelaw and the partnership and LLC
law.
In fact, that case you mentionedcame out of a general
partnership.
The duty of candor applied to ageneral partner is the same as
(03:59):
the duty of candor applied todirectors.
So for these reasons, the dutyis just a little bit more
complicated than might seem atfirst, but ultimately, I think
the concept is if you owe a dutyto somebody, you owe a duty to
shoot square with them.
SPEAKER_02 (04:13):
So I was going to say, I've heard many references
so far to fiduciaries and dutiesIsn't this on the surface of
something that's maybe a littlemore simple than something
requiring those big words?
SPEAKER_01 (04:22):
Well, you're kind of right about that.
You know, the duty of candoranalysis, though, can be a
little bit more layered thancare and loyalty analyses when
you kind of get down to it.
But generally speaking, theapproach to looking at or
evaluating a possible duty ofcandor breach is kind of the
same approach as evaluatingother possible fiduciary duty
(04:43):
breaches.
You know, it's threefold, Ithink.
First, is the question ofwhether or not the individual in
question serves in a recognizedfiduciary role.
Am I a fiduciary?
Would the law consider me to bea fiduciary?
Second immediately is, okay, ifthat's the case, to whom or what
do you owe a fiduciary duty to?
(05:04):
Who are your obligations owedto?
A person like another directoror the stockholders or the
organization's mission if you'rea nonprofit?
The third question relates to,okay, fine, if I'm a fiduciary
and I owe a duties to RobGervais Charities Incorporated,
then what are the duties?
What's the expected standard ofconduct?
(05:25):
Is it carol loyalty, candor,obedience, whatever?
And then finally, what are theexpectations of me?
And I'm serving that role.
Have I failed to discharge myduties as expected in the
standard of conduct?
So again, real simple.
Am I a I exercise that dutyconsistent with the prevailing
(05:49):
standard of conduct.
That's the basic checklist.
SPEAKER_02 (05:53):
So as we start to make a little deeper dive here
into some of the legalitiesaround this, can you give us a
little more fine point on thosefirst couple of points in some
background?
SPEAKER_01 (06:01):
Yeah, I think it's probably good to start just to
kind of a reminder of thetraditional positions that
usually confer fiduciary status.
A trustee, a director, anofficer, controlling
shareholders, and others.
The status is going toultimately be governed by the
nature of the relationship.
And some state laws may differ alittle bit, but you can pretty
much be sure if you're dealingwith a person or you're advising
(06:23):
a client or a client's agentthat fits within one of those
categories, you're probablygoing to have a fiduciary
relationship.
But again, you have to look atthe totality of the
circumstances and what theyinvolve.
SPEAKER_02 (06:35):
And maybe, Michael, would you mind expanding on some
of what those circumstancesmight be?
SPEAKER_01 (06:40):
Yeah, I suspect, Rob, this will be familiar to a
lot of our audience.
As you know, in a for-profitcorporation, direct directors
owe their fiduciary duties tothe corporation and the
stockholders.
In a not-for-profit, they owetheir duties to the mission and
purposes of the company, not toa person.
If you went down a list, I wouldsay directors owe fiduciary
duties to common stockholdersand preference to preferred
(07:03):
stockholders.
An insolvent corporation getsinto all sorts of ups and downs
with respect to whetherfiduciary duties are owed to
creditors and if so, at whattime.
A controlling shareholder owesfiduciary duties to the company
and the minority shareholders.
And what we, I think, forgetsometimes, Rob, and I think you
have to check your state laws,in a lot of states, certainly
(07:26):
Delaware, corporate officers owefiduciary duties to the company
and its stockholders, or if it'sa nonprofit, its mission.
That's always something I thinkis important to check if you're
advising a board in a particularstate.
Does that state follow theDelaware concept that corporate
officers owe the same duties ofcare and loyalty as directors
(07:46):
owe?
That's always a good thing tocheck on before you start diving
into an issue.
But remember, the corporationitself doesn't owe duties to its
stockholders.
It's the directors that owe thatduty.
SPEAKER_02 (07:58):
So in your answer, you gave us a pretty good start
to a treatise there.
Let's maybe go back to a typicalcorporate scenario.
How do you see the duty ofcandor kicking in?
SPEAKER_01 (08:05):
Well, I think that's a really good question, and we
need to think more broadly aboutthat now that this case is out.
I would say the directors owe aduty of candor or disclosure to
each other with respect tocompany matters.
That's the situation, at leastin my practice, where I see this
kick in the most.
In other words, a director can'tknowingly lie or omit
(08:27):
information when speaking withother directors.
When it comes to topics orinformation that you know or
have every reason to know isrelevant and material to the
company.
This is a concept that was a bigdeal in Sarbanes.
I know it's a funny thing, Rob,but as we get further and
further away from Sarbanes.
(08:47):
To me, that was like yesterday,but it was 23 years ago.
But again, a lot of the duty ofcandor cases and theories have
been based on the issues thatarose in the Enron era where
directors were, again, pullingtheir punches, weren't being
straight with other members ofthe board when they knew or
suspected it was something goingon because of conflict they
(09:08):
didn't share it.
As one academic has noted, Ithink it's an extreme example, a
director doesn't need to explainto the rest of the board that he
got a speeding ticket.
However, like if you're on theCleveland Browns and your
defensive end was driving 120miles an hour in a 60 mile an
hour zone, then you probablywant to disclose it.
(09:30):
If the director is also beinginvestigated, you know, for
criminal activity or somethingof that nature, you know, they
could material impact thecompany's reputation.
Then you've got a duty todisclose.
And I think the same goes when adirector is sitting on
information, whether aboutanother direct And I've had that
situation a couple of times orother matters that could, again,
(09:51):
is it reasonably relevant to thework of the board?
Is it reasonably relevant to thecompany or the exercise by
another director of visitorduties like decision making?
Then, you know, I think the dutyof candor really kicks in.
The question I think often iswhen in doubt, we're going to
(10:12):
talk about this in a few moreminutes in more detail, I think
that's the question that's Yougo to the general counsel and
say, you know, we're going to betalking about this.
Is this something I need todisclose?
Similar to the kinds ofquestions board members ask when
they're filling out a conflictsof interest questionnaire.
When in doubt, ask your generalcounsel.
And if you feel uncomfortable indoing so, ask your own counsel.
Don't try and resolve thequestion yourself because you
(10:35):
may be wrong.
SPEAKER_02 (10:37):
So this podcast not only provides the best in
corporate governance counsel,but also the best in breaking
sports news.
I got
SPEAKER_01 (10:44):
a flash about that this morning.
I had to rub you about it.
I like Garrett too, but that'sfor a different podcast.
SPEAKER_02 (10:51):
So as I'm listening to you, I'm going back to my bar
exam review days.
Am I correct in remembering theconcept of fiduciary duty and
the one of duty of candor hasbeen out there for a while
versus something that's new outof a law journal or some obscure
case?
SPEAKER_01 (11:04):
Yeah, you're right, Rob.
The central theme of candor hasbeen out there for a long time,
a long line of cases.
And I think some of our audiencemay remember the old case Smith
versus Van Gorkum, which was atthe time in 1985.
And boy, would I go back tothose days.
That was the great merger case,which essentially decided that
(11:26):
the board blew its fiduciaryobligations in approving a
merger.
And that case specifically heldthat the director defendants
breached their duty of kin byfailing to make true and correct
disclosures of all theinformation they had that were
material to the transaction thatthey submitted for stockholder
approval.
(11:46):
So the bottom line is, yeah,this is not something that some
goofy judge came out with and isreally obscure.
It's been out there, and thereare actually more cases than we
might think that discuss theduty of candor in various
permutations, mostly in thefor-profit world, not
necessarily in thenot-for-profit world, although
(12:07):
it does exist in both sides ofthe fence.
SPEAKER_02 (12:11):
So as we think about how this hit our radar as far as
a breaking corporate governancedevelopment, what's arisen
lately that's really promptedyou to think through this topic?
SPEAKER_01 (12:20):
Well, I think it's because a lot of commentators on
Delaware law have picked up anew decision from about a month
or so ago from the ChanceryCourt involving what I think the
name of the case is, LeoInvestments Hong Kong Limited
versus Tamales Bay Capital.
I It's a very complex factpattern.
(12:40):
You have to read the case aboutfour or five times, and I sketch
it out to figure out all theplayers.
It arises in the concept ofpartnership arrangements, but
that, again, for purposes of ourdiscussion, it really is
immaterial.
In the case, generally speaking,high level, you had a fund
manager had planned to create aparticular fund to facilitate
(13:01):
the purchase of a famous techcompany stock, and that got
balled up when...
foreign investors' mandatorydisclosure obligations bumped up
against the tech company'spolicy against investing from
the investor's company.
In other words, the tech companyhad a policy saying, we will not
(13:23):
accept investors from company X.
And that kind of messed up thefund manager's plan to move the
stock to the foreign investors.
So what the fund manager soughtto do was boot the foreign
investors investor from thefund.
That triggered a bunch of breachof fiduciary duty claims,
including those against the fundand a duty of candor claim.
(13:49):
When you strip it all away, theChancery Court held for the fund
manager on key fiduciary breachterms, but against him on the
candor claim.
The court said, and this is along way to get to this point,
that the fund manager failed toreally screwed up in failing to
recognize and address theinvestor's disclosure
(14:12):
requirements and then formisguiding others on how to
access the share purchases.
The court specifically notedthat when the fund manager
sought to discuss withdrawalwith the foreign investor, in
other words, when he was tryingto ease them out so he could go
forward with a bigger deal, hetook on a duty to speak honestly
and completely.
In other words, there was apoint in time where the court
(14:34):
said, here, at this moment inwhen the fund manager was
talking with the foreigninvestment and talking about his
withdrawing from the fund, hesaid at that point, that crew
took on a duty to speak honestlyand completely.
And the court said by speakingfalsely and partially as to the
(14:56):
circumstances that have poppedup, he failed to comply with the
duty of candor.
So you go through a lot of pagesin the court decision, but the
basic takeaway is that the courtdid not attribute the
traditional breach of duties tothe fund manager, but it did say
that there was a point in timein your discussions with this
potential investor where youstepped into a fiduciary
(15:18):
relationship and you blew it byBSing him on the fundamental
facts and circumstances.
SPEAKER_02 (15:25):
So despite all those legal principles in that court
decision, ultimately, though, ithad an unusual outcome, didn't
it?
SPEAKER_01 (15:31):
It really did.
And I think this is what, whenyou asked the question earlier,
Rob, this is what's gotten a lotof the law professors excited
about it.
You know, in most claims ofharm, assuming that the
plaintiff isn't seekinginjunctive relief, the
plaintiff's going to seek toprove damages.
And, you know, if he can't dothat, the court's either going
to dismiss the case or in manyduty of candor situations, award
(15:55):
nominal damages.
And that's exactly what happenedat Leo Investments because no
measurable monetary moneydamages were identified.
So the court awarded theplaintiff a dollar.
And because the court said,look, the fund manager redeemed
(16:17):
the investor's investment rightaway.
So there wasn't a situation ofthe guy was, you know, lost
money, but he was The court wasconcerned about a few other
things.
So$1 was the award for the dutyof candor violation.
SPEAKER_02 (16:34):
So we as general counsels often get asked, we
hear about your legalprinciples, but tell us really
what's the risk with$1?
How can we get the attention ofour board members?
SPEAKER_01 (16:42):
Well, that's the big issue.
That's why the Leo case isreally important because there's
a much bigger potential riskinvolved and it involves
reputation.
And you and I have talked aboutthis before, Rob, on these
podcasts.
I have a tremendous concernthese days about issues of
corporate trust and reputationand individual director and
(17:04):
officer reputation.
And that's exactly what was thebig takeaway here.
In the Leo investments case, thecourt's finding made it clear
that the defendant fund managerwas not forthright, had not been
shooting square with hisinvestment partner to the point
where the court described theguy's conduct as callous.
And the court went further tosuggest the future investors
(17:26):
should think twice aboutinvesting with the guy.
Now that's, you know, you don'tusually see that in a breach of
fiduciary duty cases, especiallywhen a dollar's at stake.
So I think the answer to yourquestion is, yeah, there's a lot
bigger risk involved.
SPEAKER_02 (17:43):
Wow.
So is that a one-off opinion orare you seeing a legitimate
concern or a trend in dealingwith candor claims?
SPEAKER_01 (17:49):
Well, you know, the concept is called judicial
shaming.
And I think that's somethingthat we would want our listeners
to kind of jot down.
If you dig into this a littlebit, and it's a great way to
spend a rainy weekend as I didrecently, you find that some
courts, including DelawareChancery, have been periodically
(18:13):
willing to, I guess, act asmoral guides or arbiters of
sorts and to build into therecord some explicit criticism
of the defendant's conduct whenthey feel doing so may have a
longer-term impact on thedefendant than with monetary
(18:33):
damages.
In other words, is justiceserved better in a candor
situation by shaming thedefendant than by awarding some
large damages, which may not bejustifiable under the facts.
The challenge is that, and thisis why I think a message we want
(18:54):
to pass along, is shaming isgoing to have a broader impact
on the fiduciary community.
It's very similar to thepractices of some state AGs in
the nonprofit sector when theyare pursuing a breach of
fiduciary duty case to all alsotack on the sanction of barring
(19:16):
a board member from service forthe charitable service in that
state.
And that's, you know, that is areal powerful motivating factor.
But it's been a practice, Rob,that's been criticized by some
for concerns about fairness andproportionality.
So are you always going to saythat there's a risk of shaming?
(19:38):
I would say, yeah, I would saythat there's precedent for
shaming in the situation.
We heard the last of this no umi think somebody's going to
appeal and you know we'll seebut i think that is going back
to your question uh it's not aone-off opinion shaming is a
legitimate concern with candorclaims and again the point is
the court feeling that there'sno amount of damages that work
(20:01):
dollar damages that work herewe've got a guy who uh who who
was who was less than honest inum in the exercise of his duties
that he owed to somebody how dowe prevent that for happening
again, well, we shame him in theopinion, and that's going to
scare others off as well.
SPEAKER_02 (20:20):
Well, Michael, as always, a lot of great content
in this podcast, a lot of greatbackground on case law, as we're
asked to do here in myorganization.
How would you assign our boardmembers some key takeaways from
this podcast?
SPEAKER_01 (20:32):
Well, I probably wouldn't assign them to read the
full Leo case unless they hadbeen really, you know, that may
be a penalty for missing anumber of meetings in a row.
You have to read this case.
I think the ultimate takeaway,Rob, is that, number one, that
the duty of candor is a realthing.
It's a I think in a perfectworld, easy to satisfy, but I
(20:55):
think it requires a commitmentto be more aware of what it
means to be a fiduciary, to bemore aware of when someone is or
could fall into a fiduciaryrelationship with another person
or entity, when could thathappen?
And what good faith disclosureand being forthright means in a
particular circumstance.
(21:18):
The latter in particular, Ithink would benefit from
periodic reminding to the board.
So I think it's an example of aduty that might be best
explained by fact patterns thatare presented in board
education.
And then the general counselteaming with the chief
governance officer can be reallyeffective guys in that regard.
(21:39):
Maybe something online, maybetaping something that walks
through that the board canlisten to it as leisure, but
saying, you know, here areexamples of what is complying
with the duty of candor and hereare examples of what's not, but
my message is pay attention toit because ultimately, Rob, what
I get concerned about is thatI'm seeing more and more in my
(22:03):
practice situations, whether inthe for-profit or not-for-profit
world, where there is adisgruntled contracting party,
vendor, board member, corporatemember, whatever, that is really
pissed off and wants to hurt theorganization or wants to be a
(22:23):
nuisance and is well fundedenough to sustain litigation
long enough to drag it out andto be named in litigation for
breach of the duty of candorwould sting and so I think that
if you really peel away what Iwant directors and their counsel
(22:44):
to remember is that that's outthere and when you have this new
case getting a lot of attentionand shaming there are those out
there that maybe for goodreasons or not so good reasons
might say, hey, okay, let'spursue, you know, I'm mad at the
company.
I'm mad at the board.
Let's see if we can gin up acandor allegation.
That'll teach them.
So I do think it's worth thetime and effort to say, let's
(23:06):
take a little closer look atthis.
When we're obligated to makedisclosures, let's make sure
they satisfy the standard offull and complete and good faith
for purposes of the duty ofcandor.
Long message, but, you know,it's this one, it troubles me
and my life outside thispodcast.
SPEAKER_02 (23:24):
Great.
Well, Michael, thanks as always.
Thanks for surfacing thisimportant topic for us and
providing the background thatyou did today.
We'll look forward to being backnext month to talk about the
Guardians run to the playoffsand the latest developments in
the business judgment rule.
SPEAKER_01 (23:38):
I'm not going to make fun of the Guardians.
I've learned that lesson.
Thanks, Rob, very much.
SPEAKER_02 (23:43):
Thanks, Michael.
Have a great day.
SPEAKER_00 (23:49):
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SPEAKER_02 (00:17):
Welcome, everyone, to another in our continuing
series of corporate governancepodcasts.
This is Rob Gerberry.
I'm the chief legal officer ofSumma Health and the
president-elect designate of theHLA.
I'd like to welcome you to ourlatest in our continuing series
of podcasts on corporategovernance issues affecting
healthcare organizations.
Today's topic focuses on alittle-known element of
(00:38):
fiduciary responsibility thatcould potentially have an
outsized impact on directorexposure, the so-called duty of
candor.
In essence, the duty of candorrequires that a fiduciary shoots
square or be straight, I'velearned, with a person or entity
to whom or which it owes afiduciary duty.
And it's a duty that's receivedquite a bit of attention
following a recent Delawaredecision in which the judge
(01:00):
publicly shamed a businessmanfor the lack of candor he
demonstrated in dealing with hisinvestor clients.
The substantial attention paidby the vice chancellor to
fiduciary duties claims ingeneral and to claims involving
breach of duty in particularmake it a worthwhile subject for
the board of directors to partof their education.
As the leading governanceadvisor of the board, the
(01:21):
general counsel, likely teamingup with the chief governance
officer, is well situated tobrief the board on the basic
elements of the duty of candor,how it may apply to certain
types of director conduct, andhow best to prepare directors to
reduce exposure to duty ofcandor allegations.
And as always, I'm joined todayby my HLA colleague and friend,
Michael Peregrin of McDermott,Will and Schultz, who is also an
(01:44):
HLA fellow and a fellow of theAmerican College of Governance
counsel.
Michael, I think many of us arefamiliar with the duties of
care, the duties of loyalty, butit may be new for some of our
listeners to understand moreabout the separate duty of
candor.
Would you like to share more?
SPEAKER_01 (01:59):
Well, a little bit of inside baseball, Rob.
There certainly is a fiduciaryconcept related to candor, or as
some others describe it, to makefull disclosure.
You know, whether it's a coreduty unto itself or an adjunct
or subset of the duty of loyaltyis the subject of some debate
amongst the academics.
Not Not that it ultimatelymatters, I think.
(02:19):
No matter how it's positioned,the concept of candor or
shooting square, as youmentioned in your intro, as a
fiduciary obligation is prettywidely recognized.
And I kind of think of it alongthe lines of the duty of
obedience or the duty to obeythe law, which is kind of a part
of the duty of loyalty.
So it's out there.
(02:40):
And I think that's whether it'sa duty unto itself or pulled
into the duty of loyalty, I'mnot sure that matters.
The key is courts certainlyrecognize it.
SPEAKER_02 (02:50):
So Michael, what's the essence of this duty or
fiduciary responsibility?
SPEAKER_01 (02:54):
I think it's pretty simple.
And again, as you said, it's theconcept of an obligation of
fiduciary to act with honesty,shooting square, with whom or
what the fiduciary has afiduciary relationship.
It also entails an obligation tofully disclose information that
could conceivably harm thebusiness or an individual that
(03:17):
that's owed the fiduciary duty.
The way I describe it, Rob, is adirector can't pull his or her
punches when it comes toproviding information that he or
she has a reason to know thatwould be of relevance to another
director or to the company as awhole.
And circumstances pop up fromtime to time where it seems like
(03:38):
some directors might be inclinedto hold back, and that can lead
to real problems.
Now, we're going to be talkingabout this mostly in the
context, of course,corporations, but note that the
rule applies both the corporatelaw and the partnership and LLC
law.
In fact, that case you mentionedcame out of a general
partnership.
The duty of candor applied to ageneral partner is the same as
(03:59):
the duty of candor applied todirectors.
So for these reasons, the dutyis just a little bit more
complicated than might seem atfirst, but ultimately, I think
the concept is if you owe a dutyto somebody, you owe a duty to
shoot square with them.
SPEAKER_02 (04:13):
So I was going to say, I've heard many references
so far to fiduciaries and dutiesIsn't this on the surface of
something that's maybe a littlemore simple than something
requiring those big words?
SPEAKER_01 (04:22):
Well, you're kind of right about that.
You know, the duty of candoranalysis, though, can be a
little bit more layered thancare and loyalty analyses when
you kind of get down to it.
But generally speaking, theapproach to looking at or
evaluating a possible duty ofcandor breach is kind of the
same approach as evaluatingother possible fiduciary duty
(04:43):
breaches.
You know, it's threefold, Ithink.
First, is the question ofwhether or not the individual in
question serves in a recognizedfiduciary role.
Am I a fiduciary?
Would the law consider me to bea fiduciary?
Second immediately is, okay, ifthat's the case, to whom or what
do you owe a fiduciary duty to?
(05:04):
Who are your obligations owedto?
A person like another directoror the stockholders or the
organization's mission if you'rea nonprofit?
The third question relates to,okay, fine, if I'm a fiduciary
and I owe a duties to RobGervais Charities Incorporated,
then what are the duties?
What's the expected standard ofconduct?
(05:25):
Is it carol loyalty, candor,obedience, whatever?
And then finally, what are theexpectations of me?
And I'm serving that role.
Have I failed to discharge myduties as expected in the
standard of conduct?
So again, real simple.
Am I a I exercise that dutyconsistent with the prevailing
(05:49):
standard of conduct.
That's the basic checklist.
SPEAKER_02 (05:53):
So as we start to make a little deeper dive here
into some of the legalitiesaround this, can you give us a
little more fine point on thosefirst couple of points in some
background?
SPEAKER_01 (06:01):
Yeah, I think it's probably good to start just to
kind of a reminder of thetraditional positions that
usually confer fiduciary status.
A trustee, a director, anofficer, controlling
shareholders, and others.
The status is going toultimately be governed by the
nature of the relationship.
And some state laws may differ alittle bit, but you can pretty
much be sure if you're dealingwith a person or you're advising
(06:23):
a client or a client's agentthat fits within one of those
categories, you're probablygoing to have a fiduciary
relationship.
But again, you have to look atthe totality of the
circumstances and what theyinvolve.
SPEAKER_02 (06:35):
And maybe, Michael, would you mind expanding on some
of what those circumstancesmight be?
SPEAKER_01 (06:40):
Yeah, I suspect, Rob, this will be familiar to a
lot of our audience.
As you know, in a for-profitcorporation, direct directors
owe their fiduciary duties tothe corporation and the
stockholders.
In a not-for-profit, they owetheir duties to the mission and
purposes of the company, not toa person.
If you went down a list, I wouldsay directors owe fiduciary
duties to common stockholdersand preference to preferred
(07:03):
stockholders.
An insolvent corporation getsinto all sorts of ups and downs
with respect to whetherfiduciary duties are owed to
creditors and if so, at whattime.
A controlling shareholder owesfiduciary duties to the company
and the minority shareholders.
And what we, I think, forgetsometimes, Rob, and I think you
have to check your state laws,in a lot of states, certainly
(07:26):
Delaware, corporate officers owefiduciary duties to the company
and its stockholders, or if it'sa nonprofit, its mission.
That's always something I thinkis important to check if you're
advising a board in a particularstate.
Does that state follow theDelaware concept that corporate
officers owe the same duties ofcare and loyalty as directors
(07:46):
owe?
That's always a good thing tocheck on before you start diving
into an issue.
But remember, the corporationitself doesn't owe duties to its
stockholders.
It's the directors that owe thatduty.
SPEAKER_02 (07:58):
So in your answer, you gave us a pretty good start
to a treatise there.
Let's maybe go back to a typicalcorporate scenario.
How do you see the duty ofcandor kicking in?
SPEAKER_01 (08:05):
Well, I think that's a really good question, and we
need to think more broadly aboutthat now that this case is out.
I would say the directors owe aduty of candor or disclosure to
each other with respect tocompany matters.
That's the situation, at leastin my practice, where I see this
kick in the most.
In other words, a director can'tknowingly lie or omit
(08:27):
information when speaking withother directors.
When it comes to topics orinformation that you know or
have every reason to know isrelevant and material to the
company.
This is a concept that was a bigdeal in Sarbanes.
I know it's a funny thing, Rob,but as we get further and
further away from Sarbanes.
(08:47):
To me, that was like yesterday,but it was 23 years ago.
But again, a lot of the duty ofcandor cases and theories have
been based on the issues thatarose in the Enron era where
directors were, again, pullingtheir punches, weren't being
straight with other members ofthe board when they knew or
suspected it was something goingon because of conflict they
(09:08):
didn't share it.
As one academic has noted, Ithink it's an extreme example, a
director doesn't need to explainto the rest of the board that he
got a speeding ticket.
However, like if you're on theCleveland Browns and your
defensive end was driving 120miles an hour in a 60 mile an
hour zone, then you probablywant to disclose it.
(09:30):
If the director is also beinginvestigated, you know, for
criminal activity or somethingof that nature, you know, they
could material impact thecompany's reputation.
Then you've got a duty todisclose.
And I think the same goes when adirector is sitting on
information, whether aboutanother direct And I've had that
situation a couple of times orother matters that could, again,
(09:51):
is it reasonably relevant to thework of the board?
Is it reasonably relevant to thecompany or the exercise by
another director of visitorduties like decision making?
Then, you know, I think the dutyof candor really kicks in.
The question I think often iswhen in doubt, we're going to
(10:12):
talk about this in a few moreminutes in more detail, I think
that's the question that's Yougo to the general counsel and
say, you know, we're going to betalking about this.
Is this something I need todisclose?
Similar to the kinds ofquestions board members ask when
they're filling out a conflictsof interest questionnaire.
When in doubt, ask your generalcounsel.
And if you feel uncomfortable indoing so, ask your own counsel.
Don't try and resolve thequestion yourself because you
(10:35):
may be wrong.
SPEAKER_02 (10:37):
So this podcast not only provides the best in
corporate governance counsel,but also the best in breaking
sports news.
I got
SPEAKER_01 (10:44):
a flash about that this morning.
I had to rub you about it.
I like Garrett too, but that'sfor a different podcast.
SPEAKER_02 (10:51):
So as I'm listening to you, I'm going back to my bar
exam review days.
Am I correct in remembering theconcept of fiduciary duty and
the one of duty of candor hasbeen out there for a while
versus something that's new outof a law journal or some obscure
case?
SPEAKER_01 (11:04):
Yeah, you're right, Rob.
The central theme of candor hasbeen out there for a long time,
a long line of cases.
And I think some of our audiencemay remember the old case Smith
versus Van Gorkum, which was atthe time in 1985.
And boy, would I go back tothose days.
That was the great merger case,which essentially decided that
(11:26):
the board blew its fiduciaryobligations in approving a
merger.
And that case specifically heldthat the director defendants
breached their duty of kin byfailing to make true and correct
disclosures of all theinformation they had that were
material to the transaction thatthey submitted for stockholder
approval.
(11:46):
So the bottom line is, yeah,this is not something that some
goofy judge came out with and isreally obscure.
It's been out there, and thereare actually more cases than we
might think that discuss theduty of candor in various
permutations, mostly in thefor-profit world, not
necessarily in thenot-for-profit world, although
(12:07):
it does exist in both sides ofthe fence.
SPEAKER_02 (12:11):
So as we think about how this hit our radar as far as
a breaking corporate governancedevelopment, what's arisen
lately that's really promptedyou to think through this topic?
SPEAKER_01 (12:20):
Well, I think it's because a lot of commentators on
Delaware law have picked up anew decision from about a month
or so ago from the ChanceryCourt involving what I think the
name of the case is, LeoInvestments Hong Kong Limited
versus Tamales Bay Capital.
I It's a very complex factpattern.
(12:40):
You have to read the case aboutfour or five times, and I sketch
it out to figure out all theplayers.
It arises in the concept ofpartnership arrangements, but
that, again, for purposes of ourdiscussion, it really is
immaterial.
In the case, generally speaking,high level, you had a fund
manager had planned to create aparticular fund to facilitate
(13:01):
the purchase of a famous techcompany stock, and that got
balled up when...
foreign investors' mandatorydisclosure obligations bumped up
against the tech company'spolicy against investing from
the investor's company.
In other words, the tech companyhad a policy saying, we will not
(13:23):
accept investors from company X.
And that kind of messed up thefund manager's plan to move the
stock to the foreign investors.
So what the fund manager soughtto do was boot the foreign
investors investor from thefund.
That triggered a bunch of breachof fiduciary duty claims,
including those against the fundand a duty of candor claim.
(13:49):
When you strip it all away, theChancery Court held for the fund
manager on key fiduciary breachterms, but against him on the
candor claim.
The court said, and this is along way to get to this point,
that the fund manager failed toreally screwed up in failing to
recognize and address theinvestor's disclosure
(14:12):
requirements and then formisguiding others on how to
access the share purchases.
The court specifically notedthat when the fund manager
sought to discuss withdrawalwith the foreign investor, in
other words, when he was tryingto ease them out so he could go
forward with a bigger deal, hetook on a duty to speak honestly
and completely.
In other words, there was apoint in time where the court
(14:34):
said, here, at this moment inwhen the fund manager was
talking with the foreigninvestment and talking about his
withdrawing from the fund, hesaid at that point, that crew
took on a duty to speak honestlyand completely.
And the court said by speakingfalsely and partially as to the
(14:56):
circumstances that have poppedup, he failed to comply with the
duty of candor.
So you go through a lot of pagesin the court decision, but the
basic takeaway is that the courtdid not attribute the
traditional breach of duties tothe fund manager, but it did say
that there was a point in timein your discussions with this
potential investor where youstepped into a fiduciary
(15:18):
relationship and you blew it byBSing him on the fundamental
facts and circumstances.
SPEAKER_02 (15:25):
So despite all those legal principles in that court
decision, ultimately, though, ithad an unusual outcome, didn't
it?
SPEAKER_01 (15:31):
It really did.
And I think this is what, whenyou asked the question earlier,
Rob, this is what's gotten a lotof the law professors excited
about it.
You know, in most claims ofharm, assuming that the
plaintiff isn't seekinginjunctive relief, the
plaintiff's going to seek toprove damages.
And, you know, if he can't dothat, the court's either going
to dismiss the case or in manyduty of candor situations, award
(15:55):
nominal damages.
And that's exactly what happenedat Leo Investments because no
measurable monetary moneydamages were identified.
So the court awarded theplaintiff a dollar.
And because the court said,look, the fund manager redeemed
(16:17):
the investor's investment rightaway.
So there wasn't a situation ofthe guy was, you know, lost
money, but he was The court wasconcerned about a few other
things.
So$1 was the award for the dutyof candor violation.
SPEAKER_02 (16:34):
So we as general counsels often get asked, we
hear about your legalprinciples, but tell us really
what's the risk with$1?
How can we get the attention ofour board members?
SPEAKER_01 (16:42):
Well, that's the big issue.
That's why the Leo case isreally important because there's
a much bigger potential riskinvolved and it involves
reputation.
And you and I have talked aboutthis before, Rob, on these
podcasts.
I have a tremendous concernthese days about issues of
corporate trust and reputationand individual director and
(17:04):
officer reputation.
And that's exactly what was thebig takeaway here.
In the Leo investments case, thecourt's finding made it clear
that the defendant fund managerwas not forthright, had not been
shooting square with hisinvestment partner to the point
where the court described theguy's conduct as callous.
And the court went further tosuggest the future investors
(17:26):
should think twice aboutinvesting with the guy.
Now that's, you know, you don'tusually see that in a breach of
fiduciary duty cases, especiallywhen a dollar's at stake.
So I think the answer to yourquestion is, yeah, there's a lot
bigger risk involved.
SPEAKER_02 (17:43):
Wow.
So is that a one-off opinion orare you seeing a legitimate
concern or a trend in dealingwith candor claims?
SPEAKER_01 (17:49):
Well, you know, the concept is called judicial
shaming.
And I think that's somethingthat we would want our listeners
to kind of jot down.
If you dig into this a littlebit, and it's a great way to
spend a rainy weekend as I didrecently, you find that some
courts, including DelawareChancery, have been periodically
(18:13):
willing to, I guess, act asmoral guides or arbiters of
sorts and to build into therecord some explicit criticism
of the defendant's conduct whenthey feel doing so may have a
longer-term impact on thedefendant than with monetary
(18:33):
damages.
In other words, is justiceserved better in a candor
situation by shaming thedefendant than by awarding some
large damages, which may not bejustifiable under the facts.
The challenge is that, and thisis why I think a message we want
(18:54):
to pass along, is shaming isgoing to have a broader impact
on the fiduciary community.
It's very similar to thepractices of some state AGs in
the nonprofit sector when theyare pursuing a breach of
fiduciary duty case to all alsotack on the sanction of barring
(19:16):
a board member from service forthe charitable service in that
state.
And that's, you know, that is areal powerful motivating factor.
But it's been a practice, Rob,that's been criticized by some
for concerns about fairness andproportionality.
So are you always going to saythat there's a risk of shaming?
(19:38):
I would say, yeah, I would saythat there's precedent for
shaming in the situation.
We heard the last of this no umi think somebody's going to
appeal and you know we'll seebut i think that is going back
to your question uh it's not aone-off opinion shaming is a
legitimate concern with candorclaims and again the point is
the court feeling that there'sno amount of damages that work
(20:01):
dollar damages that work herewe've got a guy who uh who who
was who was less than honest inum in the exercise of his duties
that he owed to somebody how dowe prevent that for happening
again, well, we shame him in theopinion, and that's going to
scare others off as well.
SPEAKER_02 (20:20):
Well, Michael, as always, a lot of great content
in this podcast, a lot of greatbackground on case law, as we're
asked to do here in myorganization.
How would you assign our boardmembers some key takeaways from
this podcast?
SPEAKER_01 (20:32):
Well, I probably wouldn't assign them to read the
full Leo case unless they hadbeen really, you know, that may
be a penalty for missing anumber of meetings in a row.
You have to read this case.
I think the ultimate takeaway,Rob, is that, number one, that
the duty of candor is a realthing.
It's a I think in a perfectworld, easy to satisfy, but I
(20:55):
think it requires a commitmentto be more aware of what it
means to be a fiduciary, to bemore aware of when someone is or
could fall into a fiduciaryrelationship with another person
or entity, when could thathappen?
And what good faith disclosureand being forthright means in a
particular circumstance.
(21:18):
The latter in particular, Ithink would benefit from
periodic reminding to the board.
So I think it's an example of aduty that might be best
explained by fact patterns thatare presented in board
education.
And then the general counselteaming with the chief
governance officer can be reallyeffective guys in that regard.
(21:39):
Maybe something online, maybetaping something that walks
through that the board canlisten to it as leisure, but
saying, you know, here areexamples of what is complying
with the duty of candor and hereare examples of what's not, but
my message is pay attention toit because ultimately, Rob, what
I get concerned about is thatI'm seeing more and more in my
(22:03):
practice situations, whether inthe for-profit or not-for-profit
world, where there is adisgruntled contracting party,
vendor, board member, corporatemember, whatever, that is really
pissed off and wants to hurt theorganization or wants to be a
(22:23):
nuisance and is well fundedenough to sustain litigation
long enough to drag it out andto be named in litigation for
breach of the duty of candorwould sting and so I think that
if you really peel away what Iwant directors and their counsel
(22:44):
to remember is that that's outthere and when you have this new
case getting a lot of attentionand shaming there are those out
there that maybe for goodreasons or not so good reasons
might say, hey, okay, let'spursue, you know, I'm mad at the
company.
I'm mad at the board.
Let's see if we can gin up acandor allegation.
That'll teach them.
So I do think it's worth thetime and effort to say, let's
(23:06):
take a little closer look atthis.
When we're obligated to makedisclosures, let's make sure
they satisfy the standard offull and complete and good faith
for purposes of the duty ofcandor.
Long message, but, you know,it's this one, it troubles me
and my life outside thispodcast.
SPEAKER_02 (23:24):
Great.
Well, Michael, thanks as always.
Thanks for surfacing thisimportant topic for us and
providing the background thatyou did today.
We'll look forward to being backnext month to talk about the
Guardians run to the playoffsand the latest developments in
the business judgment rule.
SPEAKER_01 (23:38):
I'm not going to make fun of the Guardians.
I've learned that lesson.
Thanks, Rob, very much.
SPEAKER_02 (23:43):
Thanks, Michael.
Have a great day.
SPEAKER_00 (23:49):
If you enjoyed this episode, be sure to subscribe to
AHLA's Speaking of Health Lawwherever you get your podcasts.
For more information about AHLAand the educational resources
available to the health lawcommunity, visit
AmericanHealthLaw.org.
And stay updated on breakinghealthcare industry news from
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UNKNOWN (24:19):
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