Delaware Split on Sexual Harassment Liability Opens New Debate

The Delaware Supreme Court is the next venue for a novel question that’s split the state’s elite business court—when corporate leaders are liable to shareholders for failing to handle internal sexual misconduct complaints.

Three Chancery Court judges have now issued as many separate opinions on the issue. Chancellor Kathaleen St. Jude McCormick earlier this month allowed shareholders to advance claims that eXp World Holdings Inc.’s founder helped conceal rapes and sexual assaults allegedly committed by its top real estate agents. She framed the core of the dispute by inquiring if sex-based harm is categorically different from other causes of corporate harm.

She rejected the exclusion of certain workplace misconduct as grounds for a fiduciary breach, which was described in a December decision by a Delaware Chancery Court colleague that dismissed a lawsuit against an executive who harassed two employees of Credit Glory Inc., a company that helps consumers dispute credit reports.

The Credit Glory ruling in turn criticized a novel 2023 opinion by a third Chancery Court judge finding sexual harassment was actionable in oversight claims against an ousted HR chief at McDonald’s Corp.

Credit Glory’s president, as a shareholder, is appealing Will’s decision dismissing his claims against its ex-vice president. Opening briefs are due Feb. 13.

The individual judges behind these decisions could each be correct because each case’s facts are distinguishable, legal experts say.

The breach McCormick identified in eXp “is not the underlying misconduct, but the use of corporate power to suppress, tolerate, and economically benefit from it once it was known,” said Carliss Chatman, a Southern Methodist University law professor.

In Credit Glory before Vice Chancellor Lori W. Will, Chatman said, interpersonal misconduct typically addressed under employment law was presented as a loyalty breach without allegations of a cover-up, board-level suppression, or self-interested governance decisions. Will is concerned that “absent a limiting principle, fiduciary law would become a general morality or indemnification doctrine for workplace wrongdoing,” she said.

The high court may consider drawing a firm line between interpersonal misconduct and governance-level exploitation or concealment, or whether any policy limiting oversight liability could still allow claims where leadership knowingly sacrifices corporate integrity for private benefit.

If the justices return a narrow opinion, eXp and Credit Glory “may end up being complementary rather than contradictory decisions—marking the outer boundary of when corporate law reenters disputes that otherwise sit in employment or tort law,” Chatman said.

Judicial Disagreement

McCormick pushed back on Will’s warning of “doctrinal sprawl,” citing several procedural hurdles that already discourage stockholders from pursuing derivative lawsuits, including contingency-fee attorneys that weed out weak claims. She also argued that it wasn’t McDonald’s that stretched Delaware corporate law by finding an officer “acted disloyally through his own acts of harassment,” but the Credit Glory ruling “by excluding workplace misconduct that is of a sexual nature from the category of employee-targeting, entity-harming activities that can give rise to a claim for breach of fiduciary duty.”

McCormick’s finding no grounds for such exclusion is “a powerful affirmation that sexual misconduct can form the basis for a breach of fiduciary duty,” said Rebecca Boon, a Bernstein Litowitz Berger & Grossmann LLP partner representing the pension funds suing eXp founder Glenn Sanford.

The eXp lawsuit doesn’t depend on the Credit Glory appeal because it’s not arguing that sexual harassment per se violates fiduciary duty, she said. Will rejected that as a valid claim, but Vice Chancellor J. Travis Laster embraced it in McDonald’s, “so that’s where I think the real split resides,” Boon said.

Laster ultimately dismissed the McDonald’s case because the board tried to mitigate its toxic workplace culture.

Yale Law School Professor Jonathan Macey said McCormick is “an activist judge” while Will is “less of an activist.”

“Which doesn’t mean that Chancellor McCormick is wrong,” he said, but neither case really needed the court to address whether sexual harassment constitutes a breach of fiduciary duty.

The claims could’ve focused on recovering damages from an employee who harmed the company by requiring it to pay out, which a New York state court ordered Credit Glory to do, he said. “You wouldn’t have to touch fiduciary duties, and that would’ve sustained the claim” in the Credit Glory case, for example, he said.

“It doesn’t matter if it’s sexual harassment or any other sort of wrongdoing,” he said. “If the board’s got its head buried in the sand, is deeply conflicted, and is not addressing it, then you have a lawsuit.”

‘Ick Test’

McCormick appears to have read McDonald’s “more broadly” than Will, and that’s more in line with how retail investors approach derivative lawsuits, said Christina Sautter, also an SMU law professor and cofounder of the Center for Retail Investors & Corporate Inclusion.

Will found Credit Glory’s former vice president was accountable only to his victims, not the business, and the claims against him distorted the novel ruling in McDonald’s. Laster’s opinion exposed corporate officers for the first time to lack-of-oversight claims previously limited to directors.

Such claims comprise an “ick test” for retail investors, Sautter said. They’re asking, “Do we trust these people? Do we want to invest, or continue to invest, in a company that is behaving in this fashion?”

Laster likewise mused in a 2023 hearing in a separate case that he expected challenges to the idea that short-term gains for stockholders should prevail in consideration of any corporate action that “from a societal standpoint is a net-negative” to become a “recurring event” for boards.

The eXp ruling “provides a roadmap for how some of these claims can survive,” Sautter said. “You have a generation of investors who came of age during the #MeToo movement, and they expect corporations to be accountable for workplace culture.”