A recent decision of the Delaware Chancery Court involving Derek Jeter provides a topical opportunity to remind governing board members that fiduciary duty challenges can ensnare even the most legendary and respected public figures. By the decision, the Court required Mr. Jeter to defend himself against allegations that he breached certain fiduciary duties to an underwear manufacturer for which he served as a board member.
The case arose from an unusual arrangement whereby Mr. Jeter agreed to join the manufacturer’s board as part of a “reverse endorsement” strategy, whereby Mr. Jeter’s board membership and minority ownership interest would hopefully serve as an endorsement of the manufacturer’s product. Mr. Jeter entered into a director’s agreement that served to create a fiduciary relationship with the manufacturer and required Mr. Jeter to perform certain requirements (including making a public announcement about his role with the company). Mr. Jeter had initiated the litigation, seeking a declaration that he had satisfied his obligations under the agreement. The manufacturer counterclaimed, alleging, among other claims, that Mr. Jeter violated his fiduciary duty by making false statements to investors in bad faith while serving on the manufacturer’s board.
As Vice Chancellor Glasscock noted in the introduction to his opinion, “This case provides a cautionary tale of the mixing of roles in a corporate governance setting.” In Mr. Jeter’s circumstance, the mixing of roles involved the confusion between the goals and expectations under the reverse marketing arrangement, and the fiduciary obligations he assumed as a director and under the director’s agreement. Evolving governance arrangements in the health care industry offer the potential for a similar mixing of governance roles. This could arise, for example, with non-traditional arrangements involving so-called “celebrity directors”; exceptionally important donors; “fly-in directors”; certain types of constituent directorships and similar situations, where there is lack of clarity on the nature of the director’s board service and fiduciary relationship to the health system. The case also offers a useful example on the types of actions and nonactions that could give rise to a breach of loyalty claim.