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Clifford Chance

Clifford Chance

Briefings

A Failure to Monitor: Delaware Court Refuses to Dismiss Loyalty Claims Against Outside Directors of Foreign Based Company

2 April 2013

On February 6 in In re Puda Coal, Inc. Stockholders Litig., Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery, in a bench ruling, declined to dismiss breach of loyalty claims brought by stockholders against the independent directors of a Delaware corporation whose only operations and assets were in China.  Although the facts of the Puda Coal case (involving unauthorized transfers of corporate assets) reflect an extreme situation, the court’s decision serves as a strong reminder to independent directors of Delaware publicly-held corporations regarding their obligation to monitor corporate activities.  The decision also is notable for its suggestion that directors who resign after serious problems are uncovered may increase their potential liability by doing so.

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