Delaware Court of Chancery Rules Workplace Sexual Misconduct Oversight Failures Can Support Shareholder Breach of Fiduciary Duty Claims

Overview

In a precedent-setting derivative decision, the Delaware Court of Chancery held that a board of directors’ and senior officers’ failure to respond in good faith to clear red flags of workplace sexual misconduct may give rise to viable breach of fiduciary duty claims under Delaware law. In an opinion penned by Chancellor Kathleen J. McCormick, the court denied motions to dismiss claims against certain directors and officers of eXp World Holdings Inc., ruling that the plaintiffs had pled sufficient facts to support allegations that the company’s fiduciaries had breached their oversight obligations and that the chief executive officer (CEO) had breached his duty of loyalty by concealing information and retaining employees implicated in the alleged misconduct. Los Angeles City Employees’ Retirement System v. Glenn Sanford, et al., C.A. No. 2024-0998-KSM (Del. Ch. Jan. 16, 2026).

Key Holdings

Oversight Obligations Extend to Alleged Sexual Misconduct Risks

In Los Angeles City Employees’ Retirement System v. Sanford, the court confirmed that directors and officers may owe fiduciary duties to monitor and respond to credible reports of workplace sexual assault and misconduct. Allegations that fiduciaries ignored red flags or failed to implement effective reporting systems once the fiduciaries became aware of the allegations (i.e., allowing a so-called “rape culture” to persist), were sufficient to survive a motion to dismiss.

Duty of Oversight / Caremark Framework Applies

The court relied heavily on the Caremark doctrine, which provides the foundational framework for director oversight liability under Delaware law. See In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), and Stone v. Ritter, 911 A.2d 362 (Del. 2006) (which clarified that Caremark liability is a subset of the duty of loyalty, because it requires a showing of bad faith). Specifically, Caremark held that corporate directors may be liable for breach of the duty of loyalty if they fail to implement or monitor systems designed to ensure a company’s compliance with law and to inform the board of directors of risks. For a plaintiff to successfully make a Caremark claim, particularized facts showing bad faith must be pled, typically through one of two theories:

• Sustained or systemic failure of a board of directors to exercise oversight, such as the utter failure to attempt to assure reasonable information and reporting systems exist.¹
• Having implemented such systems, the board of directors failed to monitor or oversee them, thereby disabling itself from being informed of risks or problems requiring attention.

Caremark claims are considered “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”² because liability requires a showing of sustained or systemic failure of oversight—not mere negligence or poor judgment.

While grounded in the traditional Caremark oversight doctrine, the court in Los Angeles City Employees’ Retirement System emphasized that, in addition to avoiding negligent inaction, once a board of directors or senior management becomes aware of a credible claim of workplace sexual assault, proactive action must be taken, specifically:

• Fiduciaries must make a good-faith effort to establish reasonable information and reporting systems to identify misconduct risks.
• If red flags arise, the board and officers must respond in good faith—nominal or superficial actions that do not address the problem may be insufficient.

Breach of Loyalty For Concealment

The Los Angeles City Employees’ Retirement System v. Sanford complaint went beyond alleging passive oversight failures and squarely accused the company’s CEO of active misconduct implicating the duty of loyalty. Specifically, plaintiffs alleged that the CEO:

• Knowingly concealed credible reports of sexual assault and harassment.
• Failed to escalate those issues to the board or implement remedial measures.
• Retained high-producing agents accused of misconduct because they generated substantial revenue for the company.

According to the complaint, these decisions were not merely negligent or inattentive, but were motivated by a desire to preserve the company’s growth narrative and the CEO’s personal financial interests, including equity value and compensation tied to performance.

The court found these allegations “reasonably conceivable” and sufficient to survive a motion to dismiss because, if proven, they would support an inference that the CEO placed his own financial considerations and self-interests above the corporation’s legal and ethical obligations. That distinction is critical under Delaware law: while claims sounding in negligence or poor judgment are often dismissed under Caremark’s demanding standard, allegations of intentional concealment, bad faith or knowing toleration of unlawful conduct fall within the core of the duty of loyalty and are not protected by exculpatory charter provisions under Section 102(b)(7) of the Delaware General Corporate Law. See Del. Code Ann. tit. 8, § 102(b)(7). As a result, the court treated the CEO’s alleged conduct as qualitatively different from mere oversight lapses, exposing him to potential personal liability and allowing the claims to proceed to discovery.

Action Steps: Crisis & Compliance Management

In light of Los Angeles City Employees’ Retirement System v. Sanford, boards of directors should adopt and consistently implement the following:

• Ensure enterprise risk management and compliance systems are designed to and actually can capture and escalate reports of misconduct up the chain to the full board or appropriate committee.
• Commission independent investigations (often with outside counsel) rather than limited internal reviews when credible allegations of serious misconduct arise.
• Document board and committee discussions and decisions concerning misconduct allegations, including both factual analyses and corrective action plans, where appropriate or advisable.
• Regularly evaluate policies on sexual misconduct, harassment, retaliations and whistleblower protections to ensure they are enforced and understood across the organization.
• Provide directors with periodic training on identifying and responding to non-financial governance risks, including workplace safety and culture issues.

Broader Implications

The Los Angeles City Employees’ Retirement System v. Sanford decision, among the first of decisions of its kind but certainly not the first to give rise to allegations of this nature, calls for board oversight and obligations that encompass a broader array of corporate risks than might be obvious upon first reading.

M&A Transactions

Sexual misconduct in the workplace—known, unknown, potential, real or perceived—creates economic risks that should be carefully assessed and addressed by both sellers and acquirers in mergers and acquisitions (M&A). In M&A due diligence, parties look beyond financial statements to be able to put a price on intangible risks and assets. Any threatened or pending litigation or insurance claims, including over sexual harassment, can and should be reviewed and considered during pricing discussions. Due diligence of social issues typically covers everything from employee reviews to social media policies and should include a clear-eyed assessment of whether a company’s human resources department and policies allow for a culture permissive of sexual harassment. Boards and management must be on the lookout for red flags, including:

• Documented patterns of misconduct.
• Employment agreements that do not include “moral turpitude” or similar “for cause” provisions, or otherwise provide severance packages regardless of a finding of sexual misconduct.
• Separation or settlement agreements that relate to sexual harassment and contain non-disclosure agreements.
• Difficulty recruiting or retaining women, particularly at senior levels.
• Complaints about work culture or specific individuals.
• Evidence that serious allegations are not made to human resources.
• Prior claims or charges for harassment, discrimination, or similar misconduct.
• Suppressed or unaddressed allegations of sexual harassment.

In the world of M&A, “don’t ask, don’t tell” should not be an option for either seller or buyer.

Due diligence should assess workplace culture and misconduct risk.³

SEC Disclosure and Regulatory

Under Caremark and its progeny, the board’s obligation is not necessarily to prevent all misconduct, but to exercise good-faith oversight to ensure that there is a solid system to surface material risks, including risks arising from workplace misconduct and culture. Sexual assault or harassment issues generally become disclosure matters only when they are material to investors; however, for Caremark purposes, the board’s focus is whether it has ensured the existence and functioning of reporting, escalation and response mechanisms capable of identifying such risks before they create legal, financial or reputational harm.

In Los Angeles City Employees’ Retirement System v. Sanford, the court reinforced that oversight risk increases where boards receive—or should receive—credible internal information about systemic workplace issues, but where the company’s public disclosures about culture, compliance or employee safety are materially inconsistent with those company assertions. Even where individual incidents are not themselves disclosable, affirmative statements portraying a strong culture, effective controls or a safe workplace may give rise to liability if they are misleading in light of known internal concerns. In this context, inaccurate or overly optimistic workforce-culture disclosures can support claims not only under federal securities law, but also under state fiduciary duty principles tied to board oversight failures.

The principal risk is not the presence of misconduct alone, but a breakdown between internal reporting and external disclosure. Boards face heightened exposure where red flags (e.g., repeated complaints, regulatory inquiries, executive involvement or internal investigation findings) are not adequately monitored, documented or reflected in elevation procedures or disclosure controls. This risk is amplified when the company makes broad or aspirational statements about culture or compliance that are contradicted by internal data.

Accordingly, best practice for the board is to ensure:

• Reliable mechanisms for reporting and escalating workplace misconduct and culture risks.
• Ensuring competent and effective staffing of human resources and other management functions responsible for overseeing implementation and oversight of policies.
• Regular board-level visibility into those issues (e.g., through periodic reporting).
• Alignment between what management knows internally and what the company communicates publicly.

A disciplined, materiality-based disclosure approach, focused on actual practices with respect to governance, controls and remediation, remains critical to mitigating both Caremark oversight risk and potential securities disclosure liability.

Notably, companies face direct regulatory exposure for false or misleading statements in SEC filings, even where the underlying subject matter—such as workplace culture or misconduct—would not otherwise require disclosure. The SEC may bring enforcement actions under Rule 10b-5, Section 17(a), and periodic reporting rules for materially inaccurate statements or misleading half-truths, including aspirational or reputational statements that are contradicted by internal information. Liability can arise where disclosures about culture, compliance or controls are inconsistent with known complaints, investigations, or systemic issues. Consequences may include civil penalties, cease-and-desist orders, mandated compliance undertakings, and potential officer or director liability, often accompanied by shareholder litigation. For boards of directors, the principal risk is misalignment between what management and the board know internally and what the company says publicly.⁴

D&O Insurance

The court’s ruling in Los Angeles City Employees’ Retirement System v. Sanford may have meaningful implications for director and officer (D&O) insurance coverage, particularly for oversight and fiduciary-duty claims arising from alleged corporate misconduct. By allowing derivative claims based on board-level failures to address serious internal misconduct to survive a motion to dismiss, the decision underscores the potential for significant personal exposure to directors and officers even in the absence of adjudications. Insurers may respond by more aggressively scrutinizing whether such allegations fall within policy definitions of “wrongful acts” or instead implicate exclusions for intentional misconduct, bad faith or improper personal benefit.

The case is also likely to increase coverage disputes over defense-cost advancement and indemnification in derivative actions, especially where insurers argue that sustained oversight failures suggest non-covered conduct. At the same time, the decision may drive heightened underwriting scrutiny and encourage insureds to seek clearer policy language addressing oversight risk, cultural and compliance failures and derivative-suit coverage. Overall, the Los Angeles City Employees’ Retirement System v. Sanford ruling signals a more complex and contested directors and officers coverage landscape for claims alleging systemic governance breakdowns.

Shareholder Activism

Workplace cultures perceived to tolerate or inadequately address sexual misconduct claims can lead to targeted campaigns by shareholder activists, pension funds, unions and advocacy groups. Typically, these campaigns are framed as efforts to address material governance risks, coupled with, in these specific cases, an argument that permissive culture creates legal, reputational and financial risk, and that boards that ignore red flags, fail to enforce accountability at senior levels or allow public statements should immediately remediate or, potentially, be replaced.⁵ For instance, Mercy Investment Services (Mercy), the faith-based investment ministry, has been an active proponent of corporate reform on social and ethical issues. The organization frequently co-files shareholder proposals through coalitions of religious investors, often under the umbrella of the Interfaith Center on Corporate Responsibility, and leverages exempt solicitation statements to build broader investor backing. Its advocacy has spanned human rights in supply chains, pharmaceutical pricing practices and climate risk mitigation. In recent campaigns, Mercy has circulated exempt solicitation letters encouraging shareholders to support enhanced board oversight of workplace sexual harassment risks. Likewise, SOC Investment Group (formerly known as CtW Investment Group), has garnered a reputation for submitting and/or supporting shareholder proposals that seek to hold boards and management accountable for social and ethical concerns, including in relation to sexual misconduct.

Relatedly, during the 2023–2025 proxy seasons, the New York State and New York City Comptrollers led sustained shareholder activism campaigns pressing the Wells Fargo board on workplace harassment and discrimination oversight, including issues tied to sexual misconduct risks as part of broader governance concerns. In 2023, a proposal filed by New York State Comptroller Thomas DiNapoli and New York City Comptroller Brad Lander asking the board to prepare a public annual report on the effectiveness of its efforts to prevent harassment and discrimination, including data on complaints, settlements, arbitration clauses and concealment clauses, won majority support (i.e., approximately 55% of the vote) from shareholders, signaling investor demand for transparency and accountability on these matters.⁶ Earlier this year, the New York State Comptroller submitted a shareholder proposal⁷ urging Uber to prepare a public report on sexual misconduct incidents and the board’s role in overseeing safety and harassment prevention, responding to thousands of reported abuses and pressing leadership accountability at the governance level. Additionally, earlier activism efforts such as mass employee walkouts, open letters and shareholder demands at companies like Activision Blizzard⁸ spotlighted failure of oversight and mishandling of sexual harassment claims, pushing for board accountability and disclosures. While direct sexual misconduct or workplace harassment proposals declined in sheer number in 2025 following an SEC rule changes that made it easier for companies to exclude shareholder proposals from proxy ballots,⁹  the recent proxy landscape still reflects investor concern about human capital risks, which encompasses harassment and discrimination oversight.

High-profile campaigns can lead to board scrutiny, executive departures, governance reforms, shareholder litigation and regulatory attention. Notably, activists often succeed without proving that specific incidents were independently disclosable under SEC rules; instead, they emphasize systemic issues, misleading culture disclosures and inadequate Caremark-style oversight. For boards, the key activist risk lies in perceived tolerance of misconduct or inconsistency between internal knowledge and external messaging, which can undermine credibility and invite sustained shareholder and public pressure.

Conclusion

The court’s ruling in Los Angeles City Employees’ Retirement System v. Sanford underscores the need and legal obligation of boards and senior officers to promptly and proactively address credible sexual misconduct allegations. Once aware of a potentially credible allegation, boards and senior management must investigate, monitor and remediate risks to satisfy fiduciary duties under Delaware law. The Los Angeles City Employees’ Retirement System v. Sanford decision serves as an important reminder that fiduciaries are obligated to shape governance frameworks and to reinforce that oversight obligations extend well beyond financial reporting into workplace culture and employee safety.

^{1 From Caremark: “Generally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation, as in Graham or in this case, in my opinion only a sustained or systematic failure of the board to exercise oversight such as an utter failure to attempt to assure a reasonable information and reporting system exits will establish the lack of good faith that is a necessary condition to liability. Such a test of liability lack of good faith as evidenced by sustained or systematic failure of a director to exercise reasonable oversight is quite high. But, a demanding test of liability in the oversight context is probably beneficial to corporate shareholders as a class, as it is in the board decision context, since it makes board service by qualified persons more likely, while continuing to act as a stimulus to good faith performance of duty by such directors.” In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).}

^{2 In reCaremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).}

^{3 See, e.g., “Insight: #NotMe-Sexual Harassment Risk Assessment in Mergers & Acquisitions,” https://www.akingump.com/a/web/101994/%23NotMeTooAkinGump.pdf.}

^{4 See, e.g., “The SEC Reminds Companies Not to Forget the ‘S’ in ESG: Activision Blizzard Reaches $35 Million Settlement over Disclosure Controls Related to Workplace Complaints and Violation of Whistleblower Protection Rule,” https://www.akingump.com/en/insights/alerts/the-sec-reminds-companies-not-to-forget-the-s-in-esg-activision-blizzard-reaches-dollar35-million-settlement-over-disclosure-controls-related-to-workplace-complaints#:~:text=Key%20Points,Governance%20(ESG)%2Drelated%20disclosures.}

^{5 See, e.g., “The Recent Evolution of Shareholder Activism in the United States” which provides an account of the U.S. shareholder activism environment, drawing on “data from SEC filings, investor websites, new releases, and media to highlight the growing use of board challenges, CEO targeting, and public campaigns to drive change.”}

^{6 DiNapoli & Lander’s Proposal Calling on Wells Fargo Board to Report on Efforts to Prevent Discrimination and Harassment Wins Majority Support from Shareholders | Office of the New York State Comptroller.}

^{7 DiNapoli: Uber Needs to Explain What It Is Doing to Protect Riders from Sexual Assault | Office of the New York State Comptroller.}

^{8 See, e.g., Shareholders call on Activision Blizzard CEO to resign after employee walkout | Activision Blizzard | The Guardian. We note that Microsoft Corporation closed its acquisition of Activision Blizzard in October 2023.}

^{9 See, e.g., “Take No-Action: SEC Will Not Respond to Majority of No-Action Requests During 2026,” https://www.akingump.com/en/insights/alerts/take-no-action-sec-will-not-respond-to-majority-of-no-action-requests-during-2026.}