Thomas L. Hanley
PartnerChair, Public Companies
Business Vantage Point Blog
Go to Business Vantage Point BlogChancery Court: Board Oversight Failures Over Alleged Workplace Sexual Misconduct May Support Fiduciary Breach Claims
March 11, 2026A 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.Private Company Stock Buybacks and Tender Offers: Useful Tools If You Follow the Rules
December 8, 2023In assessing whether voluntary stock repurchases or tender offers may make sense for a privately held company, there are several business and legal factors to consider. Public companies regularly use open-market stock repurchase programs, individually negotiated stock repurchases and issuer tender offers for various reasons. These include acquiring company shares they believe are undervalued, providing additional liquidity opportunities for their investor base and accommodating certain shareholders looking to reduce or exit their investment. Although it is not nearly as common for private companies to pursue these techniques, there are a number of situations in which private companies may use them to accomplish similar goals. Read on for an overview of key business and legal considerations that private companies should keep in mind when contemplating the use of a stock repurchase or tender offer. Reasons to Pursue Buybacks or Tender Offers Many companies choose to remain private or delay their initial public offerings (IPOs) for multiple reasons, including periodic softness in the IPO market; a desire to further grow their businesses to support increased valuations for either an IPO, additional private capital infusions or sale of the company; and a reluctance to incur the direct and indirect costs of being a public company. Although private company investors generally have become more accepting of these choices, there are often circumstances in which investors (particularly early-stage venture capital investors) and employees (who often hold meaningful amounts of shares, options and restricted stock) are looking to monetize some or all of their investment in the near term rather than wait for an IPO or other exit event, and companies are willing to consider alternative ways of providing liquidity to them. In addition, companies choosing to stay private for a longer period often have a larger number of shareholders than pre-IPO companies have had in the past. In order to facilitate later-stage investments and/or prepare for an IPO, companies may benefit from reducing the number of shareholders (particularly smaller shareholders), eliminating one or more outstanding classes or series of securities, or both. Later-stage investors may want a simplified capital structure to ensure their superior rights, and, as a practical matter, a company with few shareholders and a simplified capital structure can reduce the number of issues to be resolved in connection with undertaking an IPO. In both cases, selective repurchases or tender offers may provide ways to accomplish these goals. Buybacks vs. Tender Offers: Which to Choose? The choice between share repurchases from one or a number of shareholders or undertaking a broader-based tender offer is usually driven by several considerations, including the company’s goals, the preferences or demands of current and potential investors, the availability of financing and regulatory concerns. Although each situation is different, as a general matter, the choice between share repurchases and tender offers may be summarized as follows: Providing a liquidity opportunity to one or a few shareholders on individually negotiated terms and not necessarily at the same time. Share repurchases are likely to be the better choice. Providing a liquidity opportunity to a larger number of shareholders. A tender offer is likely the better choice and may even be necessary to comply with U.S. Securities and Exchange Commission rules, as discussed below. Cleaning up capital structure to accommodate new investors or as pre-IPO preparation. Either share repurchases or tender offers, depending on the circumstances. Securities law compliance is one particular driver of the choice between repurchases and a tender offer. Although a majority of the SEC’s rules covering tender offers apply only to public companies, a number of them apply to any tender offer — public or private company — and complying with those rules may impact a company’s choice of approach. Legal Compliance: Is It a Buyback or Tender Offer? Before pursuing share repurchases or a tender offer, it is advisable to consult with counsel regarding regulatory, disclosure and related issues. A company’s charter, bylaws, shareholder/investor rights agreements and similar governing documents may limit and, in some cases, even prohibit the acquisition of its stock. In addition, state corporation laws may inhibit a company’s ability to effect share repurchases or tender offers, as acquisitions by the company of its securities are considered to be returns of capital (similar to cash dividends), and state corporation laws impose certain limitations on a company’s ability to return capital. Compliance with federal securities laws and SEC rules can also present challenges for private companies. Determining whether planned share repurchases have risen to the level where they could be deemed a tender offer is a critical step before proceeding with any share repurchases. Other than the potential disclosure issues discussed below, no federal securities laws or SEC rules directly govern share repurchases. Specific SEC rules apply to private company tender offers, but no bright-line test separates share repurchases from tender offers. Courts considering the issue apply what is commonly referred to as the Wellman test to define the boundary between repurchases and tender offers. The Wellman test looks at eight factors in analyzing whether repurchases rise to the level of tender offers that trigger the SEC’s tender offer rules: An active and widespread solicitation of shareholders to acquire their shares. The solicitation for repurchases is made for a substantial percentage of the company’s stock. The offer to purchase is made at a premium over the prevailing price/value of the stock. The terms of the offer are firm rather than negotiable. Completion of the repurchases is contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased. The offer is open only for a limited period of time. The offerees are subjected to pressure to sell their stock. Any public announcements of a purchasing program precede or accompany the rapid accumulation of large amounts of the company’s securities. Not all of these factors are relevant (or as relevant) to private companies, and no particular factor or group of factors is determinative, so even with these guidelines, it is not always clear when repurchases have crossed the line into a tender offer. Most companies that want to avoid compliance with the tender offer rules limit the number of shareholders from whom they repurchase securities and individually negotiate the terms of the repurchase with each shareholder. These techniques counter several of the key factors cited in the Wellman test. If possible, a company may want to preserve flexibility and avoid the distraction and expense of complying with these requirements and related private tender offer best practices, such as preparing a formal offer to purchase. A company in this situation may prefer to achieve its goals through individually negotiated repurchases between each selling stockholder and the company. If the repurchases, either by design or by application of the Wellman test, trigger the tender offer rules, the company will be required to adhere to the following requirements: The tender offer must be held open for at least 20 business days. The number of shares subject to the offer and the amount of consideration being offered cannot be changed unless the tender offer remains open for at least 10 business days from the date that the notice of the change is provided (with some limited exceptions). Consideration for the tendered shares must be paid promptly upon completion of the tender offer. (As a practical matter, this means the company must have the cash on hand by the closing of the offer.) The tendered shares must be returned promptly to shareholders if the tender offer is terminated or withdrawn prior to completion. Any extension of the tender offer must be announced to all holders, and the extension notice must inform them of the amount of shares already tendered. The company must disclose its position with respect to the tender (meaning that it must recommend “for” or “against” shareholders tendering their shares or state that the company does not take any position). Repurchase transactions outside of the tender offer while the tender offer is open are essentially prohibited. Disclosure of the issuer’s position is required with respect to the offeror’s tender offer for the issuer’s securities. Anti-fraud rules apply, such that the company should not pursue tender offers (or repurchases generally) when it is in possession of material nonpublic information. Disclosure Considerations Because the SEC’s anti-fraud rules generally apply to repurchases and tender offers specifically, in the context of negotiated repurchases and tender offers, the focus of the anti-fraud rules is primarily on information asymmetry. In other words, does the company have in its possession material undisclosed information that the shareholder would reasonably need to know to make an informed decision as to whether to sell or tender the shares to the company? In public company tender offers, SEC rules mandate that certain disclosures be provided to recipients of the tender offer. Although those mandates do not apply specifically to private company tender offers because of potential liability under the anti-fraud rules, private companies undertaking tender offers usually provide some sort of disclosure documentation to recipients of the tender offer. The types of disclosure, including the level of detail, will vary from situation to situation. Evaluating the appropriate level of disclosure in repurchase and tender offer situations is substantially similar to evaluating the appropriate level of disclosure if the company was offering its securities to investors for purchase, and factors like the level of sophistication of the shareholders and the shareholders’ access to information about the company are particularly relevant to the evaluation. This is another area where consultation with securities counsel is advisable. While different companies take different approaches, the disclosure-related documentation for a private company tender offer typically consists of the following: An Offer to Purchase, which contains the specific details of the offer, including the total number of shares proposed to be purchased, the offer price, allocation methodology (if the offer is oversubscribed and not all tenders will be accepted in full), the termination date of the offer and detailed instructions on how to participate. A disclosure document that may be a part of the Offer to Purchase. A letter of transmittal for use by participating shareholders to tender their shares. Pricing and Other Considerations Public company tender offers are often priced at some premium to the current market price of the shares in order to encourage shareholders to tender. The pricing of private company tender offers varies based on the surrounding circumstances. Because the purpose of the tender offer is often to provide liquidity opportunities to current shareholders, a price at or near the current fair market value (often determined by the latest 409A valuation or some other observable value, such as a recent capital-raising transaction) is often used. One practical pricing consideration involves an assessment of the company’s planned timing for an IPO: If the tender offer price is meaningfully lower than the IPO price and the tender offer and IPO are close in time to one another, the company may face complaints from shareholders. In addition to the pricing considerations, it is important to take into account other agreements, arrangements and understandings that are in place and may impact the ability of the company and/or some of the shareholders to pursue and complete a tender offer. Investor rights and similar agreements could limit or prohibit company buybacks or require approvals or waivers from certain security holders. Those agreements may also include rights of first refusal or similar rights that could be triggered by a tender offer without the agreement or waiver of the rights holders. It is important to review all relevant governing documents and key agreements for issues that may impact a tender offer.
