Business Vantage Point Blog

A recent decision from the Delaware Court of Chancery serves as an important reminder for directors of Delaware corporations on their significant oversight responsibilities and potential court scrutiny of their actions — or inaction.

In Los Angeles City Employees’ Retirement System v. Sanford, (C.A. No. 2024-0998-KSM (Del. Ch. Jan. 16, 2026)), Chancellor Kathaleen McCormick, in denying motions to dismiss breach of fiduciary duty claims brought against an executive officer and the directors of eXp World Holdings Inc. (eXp Holdings), held on January 16 that failures to respond to sexual misconduct allegations may support claims for breaches of fiduciary duties to properly exercise oversight under standards set in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

What Happened in the eXp Holdings Case?

The complaint arose out of allegations of the sexual assault of female eXp Holdings employees by two male employees, including accusations of drugging of the female employees at events sponsored by eXp Holdings. The allegations were apparently widely known within the company and had been repeatedly brought to the attention of senior management and the board of directors, including through multiple communications by a member of the board to other directors.

Two key counts of the derivative plaintiffs’ complaint survived the defendants’ motions to dismiss. One of those counts involved Glenn Sanford, the company’s CEO, who also served as a director. The other count involved the other members of the board. In each case, the complaint alleged that Sanford and the other directors breached their fiduciary duties of loyalty based on Caremark standards by:

• Failing to ensure that eXp Holdings had in place reasonable reporting and information systems that would have allowed the company and its board to know about and prevent acts of sexual assault and misconduct (an “information systems claim”).
• Failing to respond to, and consciously disregarding, the accounts of sexual assault and misconduct that were brought to the attention of Sanford and the board (a “red flag” claim).

The complaint alleged a wide variety of actions and failures to act relating to information systems and red-flag failures, including active concealment of the alleged sexual misconduct, failing to follow outside counsel’s advice (including by conducting an internal investigation controlled by interested parties rather than an independent investigation) and retaliation against a “whistleblower” member of the board, who had been provided substantial information regarding the sexual misconduct and had reported that information to Sanford and the other directors on multiple occasions through multiple means.

What the Chancery Court Found

In denying the motion to dismiss relating to the claims against Sanford, the chancellor concluded that it was "reasonably conceivable" that he engaged in the alleged cover-up and retaliatory actions and, therefore, it was also reasonably conceivable that he breached his duty of loyalty to eXp Holdings. The court noted that if the allegations against Sanford were proven, they could support a claim for breach of the duty of loyalty, in that he had placed his own personal and financial self-interests (including the value of his equity holdings and compensation that was tied, at least in part, to the production of the eXp Holdings agents involved in the misconduct) ahead of those of the company and its stockholders.

In considering the plaintiffs' allegations against the other members of the board of directors and denying their motion to dismiss, the chancellor focused on the information available to the board about the alleged misconduct, the number of ways the information had been conveyed to them, the seriousness of the allegations, and the action the board took and/or failed to take in response. The chancellor believed that the communications received by the board were sufficient to warrant board action, but in reviewing the board's response, said that it was "reasonable to infer that the Board effectively did nothing in response to the Company-wide allegations … at the heart of the red flags." In particular, the chancellor noted that the board did not change any eXp Holdings policies, failed to enact any of the reforms recommended by the whistleblower (who, as noted above, was a member of the board), failed to follow the advice of the company's outside counsel, and otherwise "took no meaningful steps to address the systemic problem of rape at eXp."

The chancellor, likely in anticipation of future defendants’ arguments based on Caremark standards, also noted that the board’s “red flag” response efforts would not be sufficient under Caremark “when it is reasonably conceivable that those efforts were nominal, tainted by deliberate heel-dragging, and ran parallel to a campaign of concealment."

A Brief Recap of Caremark

In the Caremark case, the Chancery Court held that directors of a Delaware corporation could be liable for breaches of fiduciary duty if the directors fail to implement and monitor systems that are reasonably designed to provide senior management and the board with timely, accurate information sufficient to reach informed judgments concerning both the company’s compliance with law and its business performance. While the court noted that the level of detail for any system is a business judgment matter for the board to determine, a failure to have some reasonable system may result in a director having breached a fiduciary duty tied to losses caused by noncompliance with applicable legal standards.

Plaintiff claims based on Caremark and later cases generally fall within two categories: (1) “information systems claims,” which typically allege a failure to have in place reasonable reporting and information systems that would allow senior management and the board to know about and act on matters involving noncompliance with the law; and (2) “red flag” claims, which typically allege a failure to adequately monitor or oversee the systems that have been put in place (including failures to respond to issues identified by those systems).

Caremark and later cases have emphasized the high bar that plaintiffs have to overcome to prevail on these types of claims. As a general matter, establishing liability requires some sort of showing of conduct (including failures to act) that goes beyond negligence and is indicative of sustained or systemic failures of oversight representative of bad faith.

Takeaways for Directors

Although the eXp Holdings decision only addresses motions to dismiss and does not reach any substantive conclusions as to whether fiduciary duty breaches have occurred, it does serve as a reminder that directors of Delaware corporations have significant oversight responsibilities and their actions (including failures to act) will be closely scrutinized by Delaware courts.

In this age of heightened scrutiny of corporate governance, most companies of any size (and, in particular, public companies) have in place systems that are intended to identify and report to senior management and the board relevant, risk-related information regarding the company’s compliance with the law and its business performance. But Caremark and its progeny make clear that having systems in place is only part of the oversight responsibilities. Boards can take steps to reduce the possibility of successful Caremark-based claims, including by:

• Ensuring that the systems in place are not generic but instead cover “mission-critical” risks in the context of the company’s particular business.
• Setting up and following a system of regular compliance reporting to the full board (both through the company’s risk management functions, as well as a board committee specifically empowered to monitor and report on compliance matters).
• Documenting the board’s consideration of, and action on, compliance and risk matters.
• Consulting, where appropriate, with outside experts on compliance and risk matters, including retaining third-party service providers to fill any gaps in the company’s monitoring capacity or expertise.

What’s Next?

Appeals arising from this Chancery Court case will be essential reading. The egregious nature of the sexual misconduct, combined with the subsequent conduct and actions (or lack thereof) on the part of the CEO and the board, will certainly be of interest to the Delaware Supreme Court. The decision on appeal will likely receive significant attention, particularly with regard to how the Delaware Supreme Court attempts to fit the eXp Holdings decision into two recent Chancery Court decisions — one that would appear to support the denials of the motions to dismiss in eXp Holdings, and one that would appear to be inconsistent with the eXp Holdings decision.

In a 2023 decision (In re McDonald's Corp. Stockholder Derivative Litigation, C.A. No. 2021-0324-JTL (Del. Ch. Jan. 29, 2023)), Vice Chancellor J. Travis Laster held that allegations that a human resources chief of McDonald’s Corp. had engaged in sexual harassment formed a sufficient basis for a derivative claim based on a breach of the fiduciary duty of loyalty. Although the claim was dismissed due to the plaintiff's procedural failure (failure to adequately plead demand futility), the vice chancellor found that the alleged misconduct could support a claim that the officer had “acted disloyally and for an improper purpose, unrelated to the best interests" of the company.

The decision in eXp Holdings, however, stands in contrast to Vice Chancellor Lori Will’s holding in the 2025 Credit Glory case (Brola v. Lundgren, C.A. No. 2024-1108-LWW (Del. Ch. Dec. 1, 2025)). In that case, the court held that allegations that an executive officer of Credit Glory Inc. had engaged in sexual misconduct did not adequately state a breach of fiduciary duty claim, even though the impacted employees had successfully pursued U.S. Equal Employment Opportunity Commission (EEOC) and state employment law claims against the officer (including a monetary judgment). The vice chancellor, while acknowledging the McDonald's ruling, said that McDonald's did not open the door to fiduciary-duty breach claims whenever a corporate officer engages in sexual harassment, and Delaware corporate law concepts of fiduciary duty are not meant to serve as a catch-all for every form of wrongdoing, particularly when the affected persons successfully pursued claims under employment-specific laws, and the conduct, while egregious, comprised “personal malfeasance, not a misuse of his corporate office.”

The facts in the eXp Holdings case are somewhat different than in the McDonald’s and Credit Glory cases. In particular, the alleged breaches of fiduciary duty in the McDonald’s and Credit Glory cases were made specifically against the corporate officers who had been accused of the sexual misconduct, while the eXp Holdings officer and directors who are the subject of the fiduciary duty breach claims were not personally involved in the alleged sexual misconduct. How those factual differences may impact the court’s decision on appeal remains to be seen. As it considers the eXp Holdings decision, it is reasonable to expect that the Delaware Supreme Court will try to balance the interests of Delaware corporation stockholders to hold boards accountable for oversight failures with the desire to reduce the possibility of a flood of plaintiff actions that attempt to leverage what are essentially employment-based claims into fiduciary duty-based actions.