-
Delaware Chancery Holds That Fiduciary’s Personal Misconduct Involving Corporation’s Employees Does Not Constitute A Per Se Breach of Fiduciary Duty
12/23/2025On December 1, 2025, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed with prejudice a derivative breach of fiduciary duty claim against a former director and officer of a closely held corporation alleging that his sexual harassment of employees constituted a breach of his duty of loyalty to the corporation. Brola v. Lundgren, C.A. No. 2024-1108 (Del. Ch. Dec. 1, 2025). The Court held that Delaware law does not support a claim that sexual harassment by a director or officer is a per se breach of fiduciary duty because such misconduct is generally “interpersonal, not a matter of corporate internal affairs.”
Plaintiff and defendant were the sole stockholders and directors of the Company. Defendant allegedly used his position at the Company to sexually harass certain of its employees. Former employees successfully filed charges with the Equal Employment Opportunity Commission (EEOC), and subsequent lawsuits resulted in over $1.35 million in joint liability against defendant and the Company, and $235,000 in individual liability against each. Plaintiff argued, based on In re McDonald’s Corp. S’holder Deriv. Litig., 289 A.3d 343 (Del. Ch. 2023), that defendant breached his fiduciary duties by acting selfishly and contrary to the Company’s best interests.
The Court distinguished McDonald’s on the grounds that the defendant in McDonald’s was a “senior officer charged with maintaining a safe and respectful workplace at the enterprise level” and that it was reasonably conceivable that his alleged misconduct breached his duty of loyalty because he failed to “oversee that function” and “subverted” his responsibilities by his actions. By contrast, the Court held that any interpersonal misconduct by defendant did not constitute a reasonably conceivable breach of duty to the Company because, unlike the corporate officer in McDonald’s, defendant did not “abuse[] the specific delegated authority of his corporate office.” Adopting plaintiff’s position, the Court cautioned, “would essentially impose strict [fiduciary] liability for workplace misconduct.”
In addition to the unjustified “risk of doctrinal sprawl” presented by plaintiff’s position, the Court also noted that employment and workplace misconduct disputes are adequately regulated by state and federal laws with “robust remedies” and “strict procedural guardrails” that reflect legislative choices. Permitting shareholder derivative suits over the same conduct, the Court reasoned, would undermine the balance struck by these policies, allowing shareholder plaintiffs to circumvent established procedures and potentially creating “perverse incentives” by “commodifying personal trauma” and exposing victims to scrutiny in public commercial fora “in the service of a corporate recovery and attorneys’ fees.” The Court also noted that extending Delaware fiduciary law to interpersonal misconduct that occurred in New York, under the laws of which the victims of that misconduct had already sought and obtained a judgment, presented potential comity concerns.
