Los Angeles City Employees' Retirement System v. Glenn Sanford
This text of Los Angeles City Employees' Retirement System v. Glenn Sanford (Los Angeles City Employees' Retirement System v. Glenn Sanford) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LOS ANGELES CITY EMPLOYEES’ ) RETIREMENT SYSTEM, on behalf of ) EXP WORLD HOLDINGS, INC., ) ) Plaintiff, ) ) v. ) C.A. No. 2024-0998-KSJM ) GLENN SANFORD, RANDALL ) MILES, DAN CAHIR, JASON ) GESING, EUGENE FREDERICK, and ) JAMES BRAMBLE, ) ) Defendants, and ) ) EXP WORLD HOLDINGS, INC., ) ) Nominal Defendant. )
OPINION
Date Submitted: July 28, 2025 Date Decided: January 16, 2026
Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Hannah Ross, Rebecca E. Boon, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Hydee Feldstein Soto, Joshua Geller, Miguel Bahamon, Gina Di Domenico, OFFICE OF THE LOS ANGELES CITY ATTORNEY, Los Angeles, California; Counsel for Plaintiff Los Angeles City Employees’ Retirement System.
Ned Weinberger, Mark D. Richardson, LABATON KELLER SUCHAROW LLP, Wilmington, Delaware; John Vielandi, Alfred L. Fatale III, Charles Wood, LABATON KELLER SUCHAROW LLP, New York, New York; Counsel for Additional Plaintiff Building Trades Pension Fund of Western Pennsylvania.
Rudolf Koch, Matthew D. Perri, Mari Boyle, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for Defendant Glenn Sanford.
Albert H. Manwaring, IV, Albert J. Carroll, Kirsten A. Zeberkiewicz, MORRIS JAMES LLP, Wilmington, Delaware; Counsel for Defendant Randall Miles. A. Thompson Bayliss, Florentina D. Field, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Counsel for Defendant Jason Gesing.
Joseph B. Cicero, Ryan M. Lindsay, Dakota B. Eckenrode, CHIPMAN BROWN CICERO & COLE LLP, Wilmington, Delaware; Counsel for Defendant Eugene Frederick.
Elena C. Norman, Skyler A. C. Speed, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Joanna A. Diakos, K&L GATES LLP, New York, New York; Stephen G. Topetzes, Theodore L. Kornobis, K&L GATES LLP, Washington, District of Columbia; Counsel for Defendant James Bramble and Nominal Defendant eXp World Holdings, Inc.
McCORMICK, C. Nominal Defendant eXp World Holdings, Inc. provides cloud-based real estate
services. For many years, top eXp agents Michael Bjorkman and David Golden
allegedly drugged and raped eXp real estate agents at company-sponsored events. A
dozen other eXp agents allegedly participated. A social media post accusing
Bjorkman of assaulting multiple women during a company event went viral in
September 2020. The board terminated Bjorkman but continued paying him. A
month later, an eXp agent sent a memo to company executives detailing seven
incidents of Bjorkman’s and Golden’s behavior. The recipients included the CEO who
sat on the board. The board did nothing. Twenty survivors reported these crimes to
an eXp director who turned whistleblower. The whistleblower raised the issue at two
separate board meetings. The board later launched an internal investigation, but it
was led by insiders. And nothing changed until survivors filed anti-trafficking claims
against the company in 2023.
The defendants here are not alleged to have harassed, drugged, assaulted, or
raped anyone. Rather, according to the plaintiff who owns eXp stock, the defendants
harmed the company by allowing their agents to be harassed, drugged, assaulted,
and raped at company events. Some defendants benefited financially from retaining
the perpetrators and actively covered up their conduct. Others failed to respond in
good faith to red flags notifying them of the company’s rape culture.
The plaintiff claims that Bjorkman and Golden made eXp’s controller, board
chair, and CEO Glenn Sanford a lot of money. The company operates like a pyramid
scheme. An agent who recruits another agent becomes the recruit’s “sponsor,” the recruit is in the sponsor’s “downline,” and sponsors are compensated based on direct
sales and on how much agents “in their downline” make. This structure incentivizes
sponsors to retain top agents in their downline. Bjorkman and Golden were in
Sanford’s downline. So Sanford had an incentive to retain them.
The plaintiff claims that Sanford breached his duty of loyalty by actively
covering up the rape culture at the company to retain the financial benefits he
received from the perpetrators. The plaintiff also claims that the defendant directors
breached their oversight obligations by failing to respond in good faith to numerous
red flags that made them aware of the rape culture. The plaintiff further claims,
based mainly on Sanford’s actions, that a control group that included Sanford
breached its oversight obligations.
The defendants moved to dismiss the complaint under Court of Chancery Rules
23.1 and 12(b)(6). This decision denies the motion as to Sanford and the director
defendants but grants the motion to dismiss the plaintiff’s novel claim for breach of
oversight obligations against the control group. Reaching the conclusion as to
Sanford requires revisiting whether workplace sexual misconduct can give rise to a
corporate trauma sufficient to support a claim for breach of fiduciary duty. It can and
does here, for a host of reasons grounded in well-settled principles of Delaware
corporate law. In contrast, extending oversight duties to the control group invites the
court to make new law. This decision declines that invitation.
2 I. FACTUAL BACKGROUND
The facts are drawn from the Corrected Verified Derivative Complaint (the
“Complaint”) and documents it incorporates by reference.1
A. The Company
Defendant Sanford founded eXp (or the “Company”) in 2009 to provide cloud-
based real estate services, mainly to residential homeowners. Its shares have traded
on the NASDAQ since 2018. The Company’s wholly owned subsidiary, eXp Realty,
LLC, generates profits by serving as a licensed real estate broker.
1. The Board And Control Group
The Company’s six-person board of directors (the “Board”) manages its
business and affairs.2 The Board changed composition mid-way through the period
covered by the Complaint. For most of that period, the Board comprised Sanford, eXp
1 2024-0998-KSJM Docket (“Dkt.”) 7 (“Compl.”). On a motion to dismiss, the court can consider documents that the complaint incorporates by reference, such as documents that the complaint quotes or cites. See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013), as corrected (Oct. 8, 2013) (“[A] plaintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms.” (quoting Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2011 WL 1167088, at *3 n.17 (Del. Ch. Mar. 29, 2011))); Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (“When a plaintiff expressly refers to and heavily relies upon documents in her complaint, these documents are considered to be incorporated by reference into the complaint; this is true even where the documents are not expressly incorporated into or attached to the complaint.”). 2 From 2019 to 2023, the Company’s board comprised seven members. Compl. ¶ 73; Dkt. 32 (“eXp Opening Br.”), Ex. 9 at 3. Although the Complaint states that the Board comprised seven members through 2023, this is inaccurate; sometime in 2023, the Board expanded to eight members, then reduced to seven when Eugene Frederick left the Board in May 2023. The Board then further reduced to six members in 2024. Dkt. 32 (“eXp Opening Br.”), Ex. 11 at 17.
3 agent Eugene Frederick, former President of eXp Realty Jason Gesing, Randall Miles,
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LOS ANGELES CITY EMPLOYEES’ ) RETIREMENT SYSTEM, on behalf of ) EXP WORLD HOLDINGS, INC., ) ) Plaintiff, ) ) v. ) C.A. No. 2024-0998-KSJM ) GLENN SANFORD, RANDALL ) MILES, DAN CAHIR, JASON ) GESING, EUGENE FREDERICK, and ) JAMES BRAMBLE, ) ) Defendants, and ) ) EXP WORLD HOLDINGS, INC., ) ) Nominal Defendant. )
OPINION
Date Submitted: July 28, 2025 Date Decided: January 16, 2026
Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Hannah Ross, Rebecca E. Boon, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Hydee Feldstein Soto, Joshua Geller, Miguel Bahamon, Gina Di Domenico, OFFICE OF THE LOS ANGELES CITY ATTORNEY, Los Angeles, California; Counsel for Plaintiff Los Angeles City Employees’ Retirement System.
Ned Weinberger, Mark D. Richardson, LABATON KELLER SUCHAROW LLP, Wilmington, Delaware; John Vielandi, Alfred L. Fatale III, Charles Wood, LABATON KELLER SUCHAROW LLP, New York, New York; Counsel for Additional Plaintiff Building Trades Pension Fund of Western Pennsylvania.
Rudolf Koch, Matthew D. Perri, Mari Boyle, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for Defendant Glenn Sanford.
Albert H. Manwaring, IV, Albert J. Carroll, Kirsten A. Zeberkiewicz, MORRIS JAMES LLP, Wilmington, Delaware; Counsel for Defendant Randall Miles. A. Thompson Bayliss, Florentina D. Field, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Counsel for Defendant Jason Gesing.
Joseph B. Cicero, Ryan M. Lindsay, Dakota B. Eckenrode, CHIPMAN BROWN CICERO & COLE LLP, Wilmington, Delaware; Counsel for Defendant Eugene Frederick.
Elena C. Norman, Skyler A. C. Speed, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Joanna A. Diakos, K&L GATES LLP, New York, New York; Stephen G. Topetzes, Theodore L. Kornobis, K&L GATES LLP, Washington, District of Columbia; Counsel for Defendant James Bramble and Nominal Defendant eXp World Holdings, Inc.
McCORMICK, C. Nominal Defendant eXp World Holdings, Inc. provides cloud-based real estate
services. For many years, top eXp agents Michael Bjorkman and David Golden
allegedly drugged and raped eXp real estate agents at company-sponsored events. A
dozen other eXp agents allegedly participated. A social media post accusing
Bjorkman of assaulting multiple women during a company event went viral in
September 2020. The board terminated Bjorkman but continued paying him. A
month later, an eXp agent sent a memo to company executives detailing seven
incidents of Bjorkman’s and Golden’s behavior. The recipients included the CEO who
sat on the board. The board did nothing. Twenty survivors reported these crimes to
an eXp director who turned whistleblower. The whistleblower raised the issue at two
separate board meetings. The board later launched an internal investigation, but it
was led by insiders. And nothing changed until survivors filed anti-trafficking claims
against the company in 2023.
The defendants here are not alleged to have harassed, drugged, assaulted, or
raped anyone. Rather, according to the plaintiff who owns eXp stock, the defendants
harmed the company by allowing their agents to be harassed, drugged, assaulted,
and raped at company events. Some defendants benefited financially from retaining
the perpetrators and actively covered up their conduct. Others failed to respond in
good faith to red flags notifying them of the company’s rape culture.
The plaintiff claims that Bjorkman and Golden made eXp’s controller, board
chair, and CEO Glenn Sanford a lot of money. The company operates like a pyramid
scheme. An agent who recruits another agent becomes the recruit’s “sponsor,” the recruit is in the sponsor’s “downline,” and sponsors are compensated based on direct
sales and on how much agents “in their downline” make. This structure incentivizes
sponsors to retain top agents in their downline. Bjorkman and Golden were in
Sanford’s downline. So Sanford had an incentive to retain them.
The plaintiff claims that Sanford breached his duty of loyalty by actively
covering up the rape culture at the company to retain the financial benefits he
received from the perpetrators. The plaintiff also claims that the defendant directors
breached their oversight obligations by failing to respond in good faith to numerous
red flags that made them aware of the rape culture. The plaintiff further claims,
based mainly on Sanford’s actions, that a control group that included Sanford
breached its oversight obligations.
The defendants moved to dismiss the complaint under Court of Chancery Rules
23.1 and 12(b)(6). This decision denies the motion as to Sanford and the director
defendants but grants the motion to dismiss the plaintiff’s novel claim for breach of
oversight obligations against the control group. Reaching the conclusion as to
Sanford requires revisiting whether workplace sexual misconduct can give rise to a
corporate trauma sufficient to support a claim for breach of fiduciary duty. It can and
does here, for a host of reasons grounded in well-settled principles of Delaware
corporate law. In contrast, extending oversight duties to the control group invites the
court to make new law. This decision declines that invitation.
2 I. FACTUAL BACKGROUND
The facts are drawn from the Corrected Verified Derivative Complaint (the
“Complaint”) and documents it incorporates by reference.1
A. The Company
Defendant Sanford founded eXp (or the “Company”) in 2009 to provide cloud-
based real estate services, mainly to residential homeowners. Its shares have traded
on the NASDAQ since 2018. The Company’s wholly owned subsidiary, eXp Realty,
LLC, generates profits by serving as a licensed real estate broker.
1. The Board And Control Group
The Company’s six-person board of directors (the “Board”) manages its
business and affairs.2 The Board changed composition mid-way through the period
covered by the Complaint. For most of that period, the Board comprised Sanford, eXp
1 2024-0998-KSJM Docket (“Dkt.”) 7 (“Compl.”). On a motion to dismiss, the court can consider documents that the complaint incorporates by reference, such as documents that the complaint quotes or cites. See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013), as corrected (Oct. 8, 2013) (“[A] plaintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms.” (quoting Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2011 WL 1167088, at *3 n.17 (Del. Ch. Mar. 29, 2011))); Freedman v. Adams, 2012 WL 1345638, at *5 (Del. Ch. Mar. 30, 2012) (“When a plaintiff expressly refers to and heavily relies upon documents in her complaint, these documents are considered to be incorporated by reference into the complaint; this is true even where the documents are not expressly incorporated into or attached to the complaint.”). 2 From 2019 to 2023, the Company’s board comprised seven members. Compl. ¶ 73; Dkt. 32 (“eXp Opening Br.”), Ex. 9 at 3. Although the Complaint states that the Board comprised seven members through 2023, this is inaccurate; sometime in 2023, the Board expanded to eight members, then reduced to seven when Eugene Frederick left the Board in May 2023. The Board then further reduced to six members in 2024. Dkt. 32 (“eXp Opening Br.”), Ex. 11 at 17.
3 agent Eugene Frederick, former President of eXp Realty Jason Gesing, Randall Miles,
Dan Cahir, and a person identified by the parties as the “Whistleblower.” The
Whistleblower also consulted the Company on diversity and inclusion efforts.
Sanford is the Board Chair. As discussed further below, the Whistleblower was not
put up for reelection and left the Board in September 2022. Non-party Monica
Weakley filled the vacancy. Frederick left the Board in May 2023 and Gesing left the
Board in January 2024. Non-parties Fred Reichheld and Peggie Pelosi replaced
them.
Through a voting agreement dated December 17, 2020, Sanford and a group of
eXp stockholders, which owned a combined 50% interest in eXp, committed to vote
together on director elections and other matters.3 The group comprises Sanford, his
former spouse, Frederick, and Gesing (together, the “Control Group”). Frederick
served on the Board from April 2016 through May 2023 and has been with eXp Realty
since April 2015. Gesing served on the Board from September 2014 through January
2024 and was CEO of eXp Realty from May 2016 through July 2016 and from October
2019 through December 2022. Gesing also served as Company President from June
2014 through September 2016.
Control Group members held positions on key Board committees. Sanford
alone comprised the Equity Committee, which has authority to make grants of
common stock under the Company’s 2015 Equity Incentive Plan.
3When the plaintiff filed the Complaint, the Control Group members’ combined ownership was 45.5%.
4 2. The Business Model
Company agents are not employees—they are brought into eXp Realty under
an “Independent Contractor Agreement.”4 Under the agreement, the Company earns
a share of each agent’s commissions. So do other agents, through a multi-level
marketing model where agents are encouraged to recruit other agents. Top agents
are called “Influencers” and often host recruitment events.5
An agent who recruits another agent becomes the recruit’s “sponsor.” The
Independent Contractor Agreement defines the sponsor as the individual “who has
been most influential in [the agent’s] decision to join eXp Realty” and directs the
joining agent to designate the sponsor.6
A sponsor does not have supervisory responsibilities but shares in a recruit’s
revenue. The recruits are placed in the sponsors’ downline, sponsors are enrolled into
the Company’s revenue share program, and sponsors are compensated under the
revenue share program based on revenue generated by their downline. After three
years, sponsors become “Vested Participants” in the program, which means that they
continue to earn money under the revenue share program even if they leave eXp.7
Through that structure, eXp’s revenue share program incentivizes sponsors to retain
top agents in their downline based on their financial performance alone. Between
4 Dkt. 32 (“eXp Opening Br.”), Ex. 1 (Indep. Contr. Agr.).
5 Compl. ¶¶ 1, 23.
6 Indep. Contr. Agr. at eXp_1017.
7 Compl. ¶ 21.
5 2018 and 2020, the Company revised its Independent Contractor Agreement to
prohibit an agent from switching sponsors.
Sanford, Frederick, and Gesing received substantial payments under the
revenue share program. In 2020, Sanford earned a bonus that was equal to his base
salary, which was based on revenue share income generated during the last five
months of 2020. Although Sanford stopped formally participating in the revenue
share program, he continues to receive a quarterly cash bonus equal to the amount
he would have received if he were still formally participating.8 In 2020, Frederick
received nearly $3.9 million in cash and stock through the revenue share program.
In 2021, Gesing earned $545,506 through the program.9
3. The Policies
The Company has a Code of Business Conduct and Ethics (the “Ethics Code”)
for its directors, officers, and employees.10 The Ethics Code provides for anonymous
reporting of potential or suspected violations of the Ethics Code or any laws that
require reporting.11 The Ethics Code prohibits retaliation. The Ethics Code states:
The Company seeks to promote and maintain a culture of compliance with all Applicable Laws and the highest standards of business conduct. Everyone at the Company should promote this culture of compliance.
[. . .]
8 Id. ¶ 90.
9 Id. ¶ 89.
10 eXp Opening Br., Ex. 2 (Ethics Code).
11 Ethics Code at eXp_0298–0299.
6 The Company is firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples of prohibited conduct include derogatory comments based on race, gender, ethnicity or sexual preference and unwelcome sexual advances.12
The Ethics Code includes a “Whistleblower Policy” to ensure compliance with
Company rules. Under the policy, the Company maintains an anonymous hotline
and webpage to collect responses.13 Employees of eXp must report information
regarding non-compliant financial reporting and disclosures but are not required
under the policy to report other compliance matters.14
The Ethics Code does not apply to eXp agents, for whom eXp has a set of
“Policies and Procedures.”15 Each Independent Contractor Agreement incorporates
the Policies and Procedures and requires adherence to them.16 The Policies and
Procedures include a section titled “Code of Conduct,” which requires all agents to
conduct their business “in accordance with applicable federal and state laws” and
“conduct themselves in an appropriate business-like manner in all activities and
relations with fellow Agents, clients, potential customers and eXp staff.”17 The Code
of Conduct further states:
It is the commitment of eXp to ensure the brokerage is free from negative, aggressive and inappropriate behaviors,
12 Id. at eXp_0292, eXp_0297.
13 Id. at eXp_0298–99.
14 Id. at eXp_0296.
15 eXp Opening Br., Ex. 3 (Policies and Procedures).
16 Indep. Contr. Agr. at eXp_1018.
17 Policies and Procedures at eXp_0352.
7 and that the environment is aimed at providing an atmosphere upholding our core values. All Agents and employees of eXp have the right to be treated with dignity and respect. All complaints of negative and inappropriate behaviors will be taken seriously and followed through to resolution. Agents or employees of eXp who file complaints will not be victimized for “whistle-blowing” or reporting others for their inappropriate behavior. Agents may file complaints by emailing compliance@exprealty.net.18
That section concludes: “Agents are subject to immediate termination for violation of
the Code of Conduct.”19
The Policies and Procedures contain a section titled “Harassment,” which
provides:
eXp takes all forms of harassment seriously. This includes but is not limited to verbal, physical or sexual. All reported or suspected occurrences of harassment will be promptly and thoroughly investigated. Any Agent that is found to have harassed another Agent, employee, client, customer or any member of the public shall be immediately, and without warning, released from eXp at eXp’s sole discretion.
If an Agent feels they have been harassed in any way, the Agent shall notify the State Broker [i.e., the designated managing broker] or a member of the corporate team immediately.
eXp will not permit or condone any acts of retaliation against anyone who files harassment complaints or cooperates in the investigation of the same.20
The Company has devoted resources toward the compliance efforts. The
Company has a dedicated Director of Agent Compliance. eXp Realty has a
18 Id. at eXp_0353.
19 Id.
20 Id. at eXp_0407–08.
8 management-level Compliance Committee, whose members during the relevant
period included (among others) the Director of Agent Compliance, the CEO of eXp
Realty, the President of U.S. Growth at eXp Realty, and the Company’s Chief Legal
Counsel, Defendant James Bramble. The Compliance Committee meets every two
weeks.21 The Company also had a Cultural Integrity Group for moral and ethical
violations, a Human Resources department, and a Global Operations Coordinator
charged with writing policies and procedures. The Company had a Director of
Diversity and Employee Success, who Plaintiff alleges was assigned as an escalation
point for complaints of sexual misconduct.
Neither the Ethics Code nor the Policies and Procedures provide an express
structure for escalating concerns of sexual misconduct to the Board.
B. Reports Of Rape And Sexual Assault
Influencers Bjorkman and Golden had worked with Sanford at another real
estate firm before joining eXp. Bjorkman and Golden were in the downline of key
eXp Influencer Brent Gove. All three were in Frederick’s downline, and thus all three
were in Sanford’s downline. Sanford and Frederick benefited from the revenue
generated by Bjorkman, Golden, Gove, and their downlines.22
21 eXp Opening Br., Ex. 6 (“Agent Five Email Commc’ns.”) at eXp_0823C.
22 Frederick also worked closely with Gove in connection with significant eXp events,
including 2024 events in Maui, Hawaii, and Cabo San Lucas. In one online webinar, Frederick touted that he and Gove “probably recruited more people in the Company” than any other Influencers. Compl. ¶ 97.
9 Bjorkman and Golden systematically harassed, drugged, assaulted, and raped
agents at eXp events dating back to at least 2018. Dozens of other eXp agents
participated in or knew of the conduct.
1. September 2020
Many of the survivors bravely began reporting the assaults in September 2020.
Three eXp agents, who this decision refers to as Agents Two, Three, and Four,23
alleged that Bjorkman and Golden drugged them and that Bjorkman raped them
during an August 2020 recruitment event in Las Vegas.
Agent Two reported the incident in September 2020 to Golden, Gove, and a
detective who later arrested Bjorkman. As alleged in the Complaint, however, Golden
had participated in many of Bjorkman’s assaults and Gove attended multiple events
where Bjorkman and Golden drugged and assaulted women. Agent Two was not
aware of Golden’s or Gove’s complicity when she reported the incident. Golden
encouraged Agent Two to lie to the police.24
23 The names of some of the survivors are public, but the court anonymizes their
names here out of caution. 24 Compl. ¶¶ 48–52.
10 Agent Three reported the assault and rape to the designated managing broker
for Florida.25
Agent Four posted on Facebook that she had been drugged at the event.
Hundreds of people commented on the post, including seven other women who stated
that they too had been drugged and sexually assaulted at eXp events.26
Later that month, the Company terminated Bjorkman’s contract with eXp
Realty for “inappropriate behaviors” that violated Company policy.27 Although he
had been with eXp for less than three years, the Compliance Committee approved an
“Accelerated Compensation Agreement” to ensure that Bjorkman’s revenue share
vested, and eXp continued to pay Bjorkman downline revenue under the revenue
share arrangement. Bjorkman was also allowed to continue selling real estate with
a small sales team.28
At the time, the Compliance Committee included Gesing, Chief Legal Counsel
Bramble, President of U.S. Growth Dave Conord, and eXp’s Director of Agent
Compliance.29 Gesing voted to provide Bjorkman with these benefits. Bramble voted
25 Id. ¶ 61
26 Id. ¶ 56.
27 Id. ¶ 83.
28 Id. ¶¶ 83–84.
29The Complaint identified Cory Haggard as Director of Agent Compliance in November 2020. It is unclear from the Complaint whether Haggard was in this position when the Company terminated Bjorkman.
11 to “[a]llow him to come back” to the Company “based on” Sanford’s undisclosed
“comments.”30
If eXp tried to terminate both Bjorkman and Golden, Gove threatened to pull
his entire team, which comprised roughly one-fifth of the Company’s agents. As a
compromise, Sanford agreed to terminate Bjorkman only.31 Upon hearing that Agent
Two wanted Golden to be terminated, Frederick commented: “we all know that’s not
going to happen.”32 Golden was allowed to continue at eXp.
2. October 2020
Reports of sexual assault continued through the fall of 2020. After learning of
the crimes against other agents, Agent One called eXp’s Director of Agent Compliance
Haggard to report that Bjorkman had raped her in April 2019.33 During that call,
Agent One told Haggard that: (i) in 2019, Bjorkman told her to stay away from Golden
because he would drug and rape her; (ii) Bjorkman had shown her videos of Golden
in which Golden was completely naked and engaging in sexual acts with women; and
(iii) an agent whom Bjorkman was trying to recruit at an event in February 2019 was
30 Id. ¶ 84 (alterations in original).
31 Id. ¶¶ 85–87.
32 Id. ¶ 54.
33 Id. ¶¶ 63–64.
12 drugged and transported to the hospital. Agent One requested a new sponsor so that
she would no longer be in Golden’s or Bjorkman’s downline.34
Also in October 2020, one of eXp’s top agents anonymously sent an eleven-page
memorandum to Gesing, Haggard, and Conord detailing Bjorkman’s and Golden’s
sexual assaults.35 Gesing was on the Board at the time. The Complaint alleges that
Sanford personally reviewed the October 2020 memorandum and took no action.36
The memorandum explained that Bjorkman and Golden assaulted women
together. Their modus operandi was to travel to events together, drug female agents
and recruits to incapacitate them, record the agents and recruits while they appeared
inebriated, and then sexually assault them. According to the memo, Bjorkman and
Golden used the recordings to coerce the women into remaining silent. The author
reported that she and her spouse had been drugged and sexually harassed by
Bjorkman and Golden at a recruiting event. The author describes several sexually
explicit videos she received from two other eXp agents. The author also detailed
numerous incidents of Bjorkman’s and Golden’s behavior that the author had
34 Id.
35 eXp Opening Br., Ex. 4 (“Anonymous Memorandum”); id., Ex. 5.
36 See Compl. ¶ 68.
13 personally witnessed throughout 2019. The author stated that other eXp agents
joined in the sexual assaults.37
The memorandum explained that, in the spring of 2020, the author reported
the incidents to Gove and another agent in Bjorkman’s upline, but they dismissed the
author’s concerns.38
3. November 2020
On November 2, 2020, the Audit Committee held a meeting. The committee
members included Sanford, Cahir, and Miles, with Miles as Committee Chair.
General Counsel Bramble also attended the meetings. Miles asked the attendees if
they were aware of any material allegations of discrimination. Sanford, Cahir, and
Bramble stated that they were unaware of any material allegations.39 The minutes
contain no record of discussion regarding any sexual misconduct. Either those issues
were not discussed or that discussion was intentionally omitted from the minutes.40
On November 9, 2020, Agent Three followed her September 2020 report with
a seven-page written statement to Haggard describing her assault and rape. In that
statement, Agent Three said that she had spoken to eleven other people, including
eXp agents, who had similar experiences.
37 Anonymous Memorandum at 1–11.
38 Id.
39eXp Opening Br., Ex. 13 (Nov. 2, 2020 Audit Committee Mtg. Minutes) at eXp_0692–93. 40 Id.
14 4. March 2021
In 2021, an eXp agent wrote an email to the entire Board, which included
Defendants Sanford, Miles, Cahir, and Gesing.41 The letter disclosed that the agent
was sexually assaulted by another eXp agent and requested an official change of
sponsorship. The Whistleblower also received several calls and text messages from
eXp agents, all reporting that they had been drugged and sexually assaulted by
Bjorkman or Golden.42 The Whistleblower raised these issues with the Board.43
On March 8, 2021, the Audit Committee held a meeting. Sanford, Miles, Cahir,
and Bramble attended. The minutes contain no record of discussion of sexual
misconduct at the Company.44 That same day, Bjorkman was arrested for sexually
assaulting an eXp agent.
5. May And June 2021
The Audit Committee met on May 4, 2021. The Board met on June 4, 2021.
According to the Complaint, the minutes of these meetings contain no record of
discussion of Bjorkman’s and Golden’s sexual assaults, the March 2021 email
reporting those assaults, or Bjorkman’s March 2021 arrest.45 Either those issues
were not discussed or that discussion was intentionally left out of the meeting
minutes.
41 Compl. ¶ 109.
42 Id.
43 Id.
44 Id. ¶ 58.
45 Id. ¶ 101; eXp Opening Br., Ex. 14 (June 4, 2021 Board Mtg. Minutes) at eXp_0722.
15 6. August And September 2021
Bjorkman was arrested again in August 2021, this time in Miami-Dade
County.46 On September 10, 2021, eXp announced that Dave Conord, eXp Realty’s
Head of U.S. Growth and a member of the Compliance Committee, was retiring. The
Whistleblower and other Board members approved Conord’s compensation package
within two days.47
7. December 2021
In December 2021, months after the Board approved the severance package,
Miles told the Whistleblower that Conord had not retired. Rather, he had been asked
to leave because he had been having an affair with a subordinate and sending
sexually explicit pictures to subordinates to pressure them into having sex with him.
Miles also told the Whistleblower that this information was “hush hush.”48 The
Whistleblower explained that she approved Conord’s compensation package based on
her understanding that Conord was retiring, and that she would not have approved
it had she known the real reasons for Conord’s departure.
Miles also told the Whistleblower that Conord was in a hotel room where
women were being drugged and sexually assaulted, confirming that Miles knew by
then about both the sexual misconduct and Conord’s personal involvement.49 Miles
stated his opinion that Conord made a mistake by being in that hotel room, not by
46 Agent Five Email Commc’ns. at eXp_0823C.
47 Compl. ¶ 104.
48 Id.
49 Id. ¶ 103.
16 failing to report the misconduct. Miles thought that, as a married man, Conord
should have known better than to stay in the hotel room past 11:00 p.m., which was
generally known as the time where attendees were locked in the room and not allowed
to leave until the next morning.50
The Company welcomed Conord back in early 2022, less than four months after
the Company announced his departure. In a Friday afternoon announcement,
Sanford and Gesing shared the news of Conord’s return to eXp, saying, “Guess who’s
back. The man is back.”51
8. March 2022
In March 2022, Agent Five reported that Bjorkman had drugged her in July
2018. She reported that multiple women suspected that they were drugged at an eXp
event in October 2018. And she reported that in September 2019, Bjorkman “placed
a roofie in [her] hand and asked [her] to take it.”52 Agent Five told Golden what
happened the night it happened, but he ignored her.53
Agent Five reported this orally to Sanford on March 7, 2022, who requested
that she forward emails reporting this behavior to him.54 He confirmed receipt. She
then emailed an eXp compliance officer on March 23, 2022, to provide details on three
50 Id. ¶¶ 31, 103.
51 Id. ¶ 105.
52 Agent Five Email Commc’ns. at eXp_0825C–26C.
53 Id. at eXp_0826C.
54 Compl. ¶ 111; Agent Five Email Commc’ns. at eXp_0822C.
17 incidents of reported drugging and request a sponsorship change.55 Bjorkman was
Agent Five’s sponsor and made money from her sales.
9. April 2022
On April 5, 2022, an eXp compliance officer left Agent Five a voicemail stating
that Agent Five’s request to change sponsors had been denied.56 The next day, Agent
Five spoke with the compliance officer, who agreed to escalate the request to eXp’s
Compliance Committee.57 The description of Agent Five’s request contained in the
minutes from the Compliance Committee meeting tracks the information provided in
the March 23, 2022 email and subsequent messages in the email chain between Agent
Five and eXp’s compliance department.58
On April 18, as Agent Five waited for a response from the Compliance
Committee, she emailed the compliance officer and raised Bjorkman’s August 2021
arrest. She also raised Golden’s continued employment at the Company, and the
“silence” of other eXp insiders who had the “full support” of “upper management [and]
board members.”59 Some of the “eXp insiders” who Agent Five named in her email
had already been identified in the October 2020 memorandum sent by a top eXp agent
to Conord, Haggard, and Gesing. The memorandum stated that those “insiders” sent
55 Id. ¶ 112.
56 Id. at eXp_0825C.
57 Id. at eXp_0824C–25C.
58 Compare Defs.’ Opening Br., Ex. 7 (“May 3, 2022 Minutes”) at eXp_1540, with
Agent Five Email Commc’ns. at eXp_0825C–26C. 59 Agent Five Email Commc’ns. at eXp_0822C.
18 sexually explicit videos to eXp agents and participated in Bjorkman’s illegal
conduct.60
That same day, the compliance officer told Agent Five that the Compliance
Committee denied her request.61 The compliance officer stated that the Independent
Contractor Agreement provides that “sponsor selection shall be permanent and may
not change.”62
Agent Five responded on April 20, 2022, copying Sanford, Gesing, Cahir, the
Whistleblower, and the eXp agent who she had selected as her new sponsor. Agent
Five included all of the prior emails on the chain. Sanford, Gesing, Cahir, and the
Whistleblower thus received all of Agent Five’s previous emails to the compliance
department, which included the following statements:
July 20th, 2018 . . . : Closing table . . . This is the first time I got so sick from one drink that I could barely walk, throwing up all over and was feeling dizzy and ill.
[ . . .]
October 22-24, 2018 eXpCon Nola 2018. Multiple women reported the next morning and shared with me the same effects of feeling drugged, dizzy and throwing up. Many of these women are no longer with the company. However there are a few who are still operating under eXp including myself.
September 23rd-25th 2019 FiveStar Conference Dallas, Texas. Rosie Rodriguez, Mike Bjorkman, David Golden sponsored a suite. As a new agent, we are encouraged to
60 See Anonymous Memorandum.
61 Agent Five Email Commc’ns. at eXp_0822C.
62 Id.
19 bring non eXp agents to get enrolled and learn about the company. This is the day where Mike Bjorkman placed a roofie in my hand and asked me to take it . . . . That night, I communicated to [Golden] what happened and he disregarded my comment.63
In her email to the Board, Agent Five states that she was drugged and that
“sexual harassment” is “real” and “is not something we should take lightly, hide or
uncover [sic].”64 She explains that “Rohypnol[,] the rape drug” had become part of
“the eXp corporate culture.”65 She also requested that eXp provide guidance on “who
to contact in case of any sexual abuse [or] drug poisoning” at eXp.66
By April 2022, the Whistleblower had received reports from 20 agents detailing
numerous sexual assaults. The Whistleblower sought advice from the Company’s
outside counsel, a law firm in Dallas, about the Board’s failure to address the reports
of sexual misconduct. Outside counsel provided numerous recommendations,
including that the Board authorize an independent investigation.67
The Whistleblower sent a message to her fellow directors through a Board
portal sharing outside counsel’s recommendations. The recipients included Sanford,
Miles, Cahir, Gesing, and Frederick. The Whistleblower wrote:
As you know, I have a unique role within the company. I serve as both a Director and Leader of Diversity and Inclusion for eXp. You all have now been made aware that there [have] been several serious allegations made against
63 Id. at eXp_0825C–0826C (cleaned up).
64 Id. at eXp_0820C.
65 Id.
66 Id. at eXp_0826C.
67 Compl. ¶ 123.
20 senior leaders of our team that require the utmost in independence as well as sensitivity to address. While I am sure as a company we have tried to address these concerns, they are at a level which requires an independent view in order to protect both the company and the alleged victims. To date, there have been three women who have come forward with similar allegations regarding being drugged and or sexually assaulted by a former agent(s) with possibly more to come. This strengthens the need for an investigation as to lessen the risk for the company.
From the outside, the internal process that has been used to investigate the claims will likely be perceived as lacking independence. (Foxes guarding the hen house approach). For the protection of the company, these cases should be reviewed and investigated outside the company by a national reputable law firm with subject matter expertise in these matters. Besides independence, the concern that I have about the approach that has been taken is that we are not taking a long term view. The ruling to deny [Agent Five] change of sponsorship is short-sighted and has long term implications to the alleged victim as well as potential damage to the company culture and brand.
Furthermore, the same request from other alleged victims was granted, which results in an inexplicable inconsistency in the conclusions.
I have given this serious thought as I have a unique perspective, role and in a position to provide insights to you. I also join you as a fiduciary with legal, and ethical responsibility to protect our company/agents/shareholders.
Based on the multiple conversations and correspondence that has been shared with me over the last few weeks by these women, it was made clear to me that they are not going away quietly. The likelihood that these incidents will be reported to the media or as a legal challenge increases daily. It may not be tomorrow, next year, or in 5 years, however, it will become public at some point as many people inside and outside of eXp are aware of these incidents.
The takeaway is that some of the women in this company don’t feel heard or protected. While the potential brand
21 damage if this does become public is incalculable, together as a Board we have an ethical responsibility to the alleged victims.
I spent the Easter holiday weekend and majority of this week listening to the insidious details of what [Agent Five] and other women who have made allegations against both Michael Bjorkman and David Golden. From what has been communicated to me, there are multiple victims that are surfacing with the same story who don’t know each other. While some have already left the company, others who have not come forward out of shame, fear of being bullied and retaliated against by leaders in their rev share organization as was reported in the correspondence (see text messages). As of last week, some of these women (and men) are now coming together and sharing information- in light of the bombshell lawsuit reported in INMAN news against our competitor Keller Williams Realty which impacted the Founder, former CEO, former President, and other key leaders. For exp, this appears to be more than just a few agents behaving badly.
My recommendations follow:
Action 1: We should immediately launch an independent investigation done by a credible law firm to assess the situation and provide recommendations. This could lead to other information being discovered where there is credible evidence of further assaults, cover ups, bullying or participation in the activities. If this occurs we will need to carefully address necessary actions.
Action 2: Change the sponsorship for any of the alleged victims who come forward with credible information to address concerns
Action 3: Proactively create both an internal and external statement supporting a zero tolerance policy for sexual harassment, misconduct or abuse of women. (and men)
Action 4: Create an independent “whistleblower hotline/process” for staff and agents to confidentially report sensitive issues.
22 Action 5: Review and amend the “revenue share for life” policy that would prohibit agents/staff that have been terminated for cause from the company to continue to financially benefit from rev share, etc.
Action 6: Encourage an environment of inclusion by having leadership reach out to the agents and listen to their concerns on a regular basis
Action 7: As both a gesture of goodwill and a proactive approach towards women in the company, adopt and fund the new women's leadership initiative that will (in partnership with men) foster, re-establish trust via peer to peer mentoring, business innovation, and a commitment to sponsor new female licensees.
I want to thank each of you in advance for your support for a more diverse, inclusive and safe environment for all eXp agents, employees and recruits.68
The Board did not adopt any of the Whistleblower’s recommendations.69
Instead, after the Whistleblower sent her message, the Board instituted the “Fox
guarding the hen house approach” that outside counsel advised against by launching
an internal investigation led by a team of five eXp employees, including two officers.70
Sanford, attempting to minimize the issue, told the Whistleblower that “this
was not their problem and would be simply a three-to-five day newspaper
phenomenon and then would disappear.”71
68 eXp Opening Br., Ex. 10 (“Whistleblower Commc’n.”) (emphases added).
69 CEO Gesing later told Agent Five that she would be permitted to change sponsors
and “offered to cover 12 months of her mortgage payments,” in response to her assertions of hardship. Compl. ¶ 118. 70 Compl. ¶ 123.
71 Id. ¶ 122.
23 According to the Complaint, the Whistleblower raised these issues at two
Board meetings. She described reports she received of rape, sexual assault, and
drugging.72 Her reports were not recorded in the meeting minutes.73 And at least
twice in response to her reports, Board members including Sanford and Miles told
her—a director and Company diversity and inclusion consultant—to mind her
business.
10. May 2022
The first mention in any Board or Committee minutes of the drugging, rape,
or sexual assault allegations appears in the May 3, 2022 Compliance Committee
minutes.74 This is the case even though the Compliance Committee meets every two
weeks, met in April to review Agent Five’s sponsorship change request, and denied
that request on April 18, 2022.
The May 3, 2022 Compliance Committee meeting occurred after Agent Five
emailed Sanford, Gesing, Cahir, and the Whistleblower on April 20. The May 3
minutes describe Agent Five’s sponsorship change request as a “Policy Exception
Request.”75
The descriptions of the “Request Details” state: “[Agent Five] stated that she
shared with a member in her upline that she was drugged in the past during a
conference and that she was once offered a roofie by Michael Bjorkman. After sharing
72 Id. ¶ 124.
73 Id. ¶¶ 99–102.
74 Compl. ¶ 114; May 3, 2022 Compliance Committee Minutes at eXp_1540.
75 Id.
24 this information, she feels her upline agents are no longer supporting her agent
attraction efforts.”76
That section further notes that “[a]llowing the change would move [Agent Five]
to a completely new revenue share line, causing potential negative impact to six eXp
agents, and Michael Bjorkman who is in vested retirement status.”77
Although the “Request Details” mention financial impact to Bjorkman, they
omit any discussion of Agent Five’s references to “sexual abuse,” eXp’s rape drug–
fueled “corporate culture,” or Agent Five’s repeated attempts to alert agents in her
upline about her experience.78
The minutes report that the Compliance Committee denied Agent Five’s
request “pending conversation” with Holly Maybery, a member of the Compliance
Committee.79 After that “conversation,” Jim Nuth, another committee member,
would “discuss the issue with the audit committee.”80
11. June 2022
Miles and Bramble informed the Whistleblower that she was being put on
“whistleblower status,” and that there would be a backlash because of the
Whistleblower’s actions.81 Before the Whistleblower came forward about the sexual
76 Id.
77 Id. (emphasis added).
78 Id.
79 Id. at eXp_1540, eXp_1543.
80 Id.
81 Compl. ¶ 125.
25 misconduct reported to her and urged the Board to act, the Whistleblower had been
asked to stay on the Board.82 After, the Governance Committee, which included
Miles, decided not to put the Whistleblower up for re-election.83 The Whistleblower’s
term expired in June 2022.
C. The Federal Suits And Media Coverage
By early 2023, the Board’s response to reports of rape and sexual assault had
been limited. To recap, in September 2020, the Board terminated Bjorkman’s agent
contract but allowed him to continue to earn revenue in retired status. The Board
also declined to terminate Golden, allegedly as a compromise to appease Gove and
potentially others. And around April 2022, the Board launched an internal
investigation that did not conform to outside counsel’s recommendations, but the
Board did not change anything. Beginning in February 2023, the sexual misconduct
at eXp prompted three suits in federal court and a New York Times exposé.
1. The First Anti-Trafficking Suit
On February 22, 2023, four eXp agents filed Acevedo v. eXp World Holdings,
Inc. et al. against eXp, Bjorkman, Golden, Gove, and Sanford in California federal
court (the “Acevedo Action”). The plaintiffs in the Acevedo Action assert claims under
federal anti-trafficking laws, as well as state-law claims for sexual and civil battery,
intentional infliction of emotional distress, and negligence.84
82 Id.
83 Id.
84 Id. ¶ 128.
26 The day after survivors filed the first lawsuit, the Board suspended Golden’s
status as an agent. Golden had qualified for revenue share vesting days before. The
Company continues to pay Golden under the revenue share agreement.
2. The Second Anti-Trafficking Suit
On December 14, 2023, an eXp agent filed Roberts v. eXp Realty, LLC et al. in
California federal court against eXp and Sanford (the “Roberts Action”). The agent
asserts claims for beneficiary liability under federal anti-trafficking laws, as well as
state-law claims for negligent hiring, retention, and supervision.85
3. The New York Times Publishes Drugged And Assaulted.
On December 15, 2023, The New York Times published an exposé on sexual
assault, rape, and drugging at eXp.86 Titled Women at Fast-Growing Realty Firm Say
They Were Drugged and Assaulted, the exposé drew from “more than 30 interviews
with current and former eXp agents,” where women said “high earners are granted
star status, and allegations of misconduct are ignored.”87 The exposé quoted one
former eXp broker as saying that the brokers “that grow their teams the fastest are
the center of attention for the company . . . . [a]nd unfortunately, it’s like they can do
no wrong.”88
85 Id. ¶ 134.
86 Id. ¶ 135 (discussing Debra Kamin, Women at Fast-Growing Realty Firm Say They
Were Drugged and Assaulted, N.Y. Times (Dec. 15, 2023), https://www.nytimes.com/2023/12/15/realestate/sexual-misconduct-exp- realty.html.). 87 Kamin, supra.
88 Id.
27 4. The Third Anti-Trafficking Suit
On January 16, 2024, a former eXp agent filed Carter v. Chris Nevada et al. in
Nevada federal court against eXp agent Chris Nevada and the Company (the “Carter
Action”). The former agent claimed that Nevada offered to pay her for sex and
inappropriately touched her and other agents. The defendants in the Carter Action,
including eXp, agreed to settle the claims. The terms of the settlement are not public.
5. A California Federal Court Sustains The First Anti- Trafficking Suit.
On January 29, 2024, the California federal court issued an 85-page decision
largely denying the defendants’ motion to dismiss the Acevedo Action. The court held
that the eXp agents met their burden of pleading facts creating a plausible inference
that: “Sanford and Gove are beneficiaries of Bjorkman’s sex trafficking” through the
revenue share program.89 According to the federal complaint, Sanford, Gove and eXp
“attempted to cover up a previous instance or allegations of sexual assault.”90 The
allegations supported an inference that “the eXp Leadership Team had a
longstanding culture—their pattern and practice—of creating an environment that
allowed these assaults, then silencing those whose accounts of sexual harassment
and assault would impact profit.”91
89 Acevedo v. eXp Realty, LLC, 713 F.Supp.3d 740, 784 (C.D. Cal. 2024).
90 Id. at 784 (citation modified).
91 Id. at 793 (citation modified).
28 D. This Litigation
Plaintiff Los Angeles City Employees’ Retirement System owns stock in eXp.
Plaintiff filed this action on October 8, 2024, against Sanford, Miles, Cahir, Gesing,
Frederick, and Bramble (collectively, “Defendants”), claiming that they breached
their fiduciary duties.
The Complaint contains four counts. In Count I, Plaintiff claims the Control
Group breached oversight obligations.92 In Count II, Plaintiff claims that Sanford
breached his fiduciary duties as a director and officer.93 In Count III, Plaintiff claims
that Frederick, Gesing, Miles, and Cahir breached their fiduciary duties as
directors.94 And in Count IV, Plaintiff claims that Bramble breached his fiduciary
duties as an officer.95
The allegations and legal theories underlying each of the four counts are
similar. Plaintiff claims that each Defendant violated his obligations under
Caremark by “failing to ensure that the Company had in place reasonable reporting
and information systems that would have allowed eXp’s officers and the Board to
know about and prevent acts of sexual assault and misconduct, and failing to respond
to and consciously disregarding the accounts of sexual assault and misconduct that
were brought to the [Defendant’s] attention.”96
92 Compl. ¶¶ 173–79.
93 Id. ¶¶ 180–86.
94 Id. ¶¶ 187–93.
95 Id. ¶¶ 194–200.
96 Id. ¶¶ 176, 182, 189, 196.
29 Plaintiff also claims that Sanford “covered up the sexual misconduct at eXp;
caused the Company to enter the ‘Accelerated Compensation Agreement,’ under
which it paid out at least $1 million to Bjorkman; and rushed Conord’s compensation
package through a Board vote, while withholding material information about the
reason for his departure that would have affected other Board members’ decisions to
approve or reject his compensation.”97
Plaintiff claims that the alleged cover-up allowed Sanford, Gesing, and
Frederick to continue reaping profits from the revenue share program, citing
Sanford’s, Gesing’s, and Frederick’s 2020 and 2021 revenue share program awards.98
Defendants moved to dismiss the Complaint on December 10, 2024.99 The
parties fully briefed the motion and the court heard oral argument on July 28, 2025.100
On January 6, 2026, the court granted the parties leave to submit supplemental
briefing on the implications, if any, of a December 2025 decision of this court, Brola
ex rel. Credit Glory Inc. v. Lundgren.101 The parties completed supplemental briefing
on January 14, 2026.102
97 Id. ¶¶ 176, 182, 189.
98 Id. ¶¶ 89, 176, 182, 189.
99 Dkts. 26–31.
100 Dkt. 68.
101 --- A.3d ---, 2025 WL 3439671 (Del. Ch. Dec. 1, 2025); see Dkt. 72.
102 Dkt. 74 (“Defs.’ Supp. Br.”); Dkt. 75 (“Pl.’s Supp. Br.”).
30 II. LEGAL ANALYSIS
Defendants have moved to dismiss the Complaint under Court of Chancery
Rule 23.1. Defendants have also moved to dismiss Counts I and III under Rule
12(b)(6).103 Because aspects of the Rule 23.1 analysis build on the Rule 12(b)(6)
analysis, this decision begins with the Rule 12(b)(6) motion.
A. Rule 12(b)(6)
“[T]he governing pleading standard in Delaware to survive a motion to dismiss
is reasonable ‘conceivability.’”104 When considering a motion under Rule 12(b)(6), the
court must “accept all well-pleaded factual allegations in the [c]omplaint as true . . . ,
draw all reasonable inferences in favor of the plaintiff, and deny the motion unless
the plaintiff could not recover under any reasonably conceivable set of circumstances
susceptible of proof.”105 The court, however, need not “accept conclusory allegations
unsupported by specific facts or . . . draw unreasonable inferences in favor of the non-
moving party.”106
Delaware law distinguishes between (i) wrongdoing based on active, self-
interested conduct that harms the corporation, such as “committing acts of sexual
103 No defendant has moved to dismiss Count II or IV under Rule 12(b)(6) against
Sanford or Bramble. So Defendants concede that these counts state claims under Rule 12(b)(6). 104 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011). 105 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
106 Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on
other grounds by Ramsey v. Georgia S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018)(citing Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
31 harassment,”107 “a conscious decision to mislead,”108 or “affirmative involvement in
[an] alleged . . . cover-up,”109 and (ii) wrongdoing based on a failure of oversight.110
Both are loyalty claims, but the former is more overt than the latter. That is because
oversight liability stems from passive (but conscious) failures to act—the notion that
“directors allowed a situation to develop and continue which exposed the corporation
to enormous legal liability and that in so doing they violated a duty to be active
monitors of corporate performance.”111
Plaintiff here asserts claims based on both types of wrongdoing—active
misconduct and oversight failures. Through Count II, Plaintiff alleges that Sanford
107 In re McDonald’s Corp. S’holder Deriv. Litig., 289 A.3d 343, 381 (Del. Ch. 2023).
108 In re Duke Energy Corp. Deriv. Litig., 2016 WL 4543788, at *13 (Del. Ch. Aug. 31,
2016) (contrasting oversight claim alleging directors’ “failure to oversee risk” versus a “fundamentally different” claim alleging that directors “made a conscious decision to mislead regulators in violation of positive law”). 109 In re Wal-Mart Stores, Inc. Del. Deriv. Litig., 2016 WL 2908344, at *10 n.49 (Del.
Ch. May 13, 2016), supplemented, 167 A.3d 513 (Del. Ch. 2017) (distinguishing between “allegations that the directors lack disinterestedness because of potential Caremark liability for consciously failing to monitor” and allegations of “the directors’ affirmative involvement in [an] alleged bribery scheme and cover-up”). 110 See McDonald’s, 289 A.3d at 380 (distinguishing between Fairhurst’s acts of harassment that gave rise to a claim for breach of the duty of loyalty and Fairhurst’s failure to establish an information system); Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006) (distinguishing between when “the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation” and when the fiduciary “intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties”) (quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006)); see also In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996) (distinguishing between a “board decision” that results in harm and an “unconsidered failure of the board” that results in harm). 111 Caremark, 698 A.2d at 967.
32 engaged in self-serving behavior by covering up the wrongdoing and ousting the
Whistleblower. Through Count III, Plaintiff alleges that each of the Defendants
breach their oversight obligations. And through Count I, Plaintiff alleges that the
Control Group members breached oversight obligations.112
1. Claim That Sanford Actively Breached The Duty Of Loyalty
The analysis of Plaintiff’s claim against Sanford begins with the governing
legal standard, moves into a discussion of the recent Credit Glory decision, and
concludes by applying the standard.
a. Applicable Legal Principles
Although “[t]he standard of loyalty is measured by no fixed scale,” a director’s
duty of loyalty “requires an undivided and unselfish loyalty to the corporation” and
“demands that there shall be no conflict between duty and self-interest.”113
“Corporate officers and directors are not permitted to use their position of trust and
confidence to further their private interests.”114
A fiduciary acts in bad faith when the fiduciary “intentionally acts with a
purpose other than that of advancing the best interests of the corporation.”115 “It
112 Although Count II is pled against Sanford only, Plaintiff argued in briefing that
Miles also actively breached his fiduciary duties. Because Count III states a claim against Miles, this decision does not address Plaintiff’s argument that Miles also breached his fiduciary duties through active misconduct. 113 Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
114 Id.
115 Stone, 911 A.2d at 369 (quoting Disney, 906 A.2d at 67).
33 makes no difference the reason why the [fiduciary] intentionally fails to pursue the
best interests of the corporation.”116
“Bad faith can be the result of any emotion that may cause a [fiduciary] to
intentionally place his own interests, preferences or appetites before the welfare of
the corporation.”117 “Bad faith is ‘not simply bad judgment or negligence,’ but rather
‘implies the conscious doing of a wrong because of dishonest purpose or moral
obliquity . . . it contemplates a state of mind affirmatively operating with furtive
design or ill will.’”118 “Greed is not the only human emotion that can pull one from
the path of propriety; so might hatred, lust, envy, revenge, . . . shame or pride.”119
Covering up a breach of fiduciary duty is a form of disloyalty because it is an
intentional act not in the best interests of the corporation. When a director knows of
a wrong, and subsequently conceals that wrong or lies about it, that “deception is
disloyal conduct in breach of his duty as a fiduciary.”120
116 Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *27 (Del. Ch.
Apr. 14, 2017) (cleaned up). 117 Id. (quoting In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *15 (Del.
Ch. Jan. 31, 1989) (Allen, C.)) (cleaned up). 118 McGowan v. Ferro, 859 A.2d 1012, 1036 (Del. Ch. 2004), aff’d, 873 A.2d 1099 (Del.
2005) (TABLE) (quoting Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208 n.16 (Del. 1993)). 119 RJR Nabisco, 1989 WL 7036, at *15.
120 Ryan v. Gifford, 935 A.2d 258, 272 (Del. Ch. 2007); cf. Lebanon Cty. Emps.’ Ret.
Fund v. AmerisourceBergen Corp., 2020 WL 132752, at *20 (Del. Ch. Jan. 13, 2020), aff’d, 243 A.3d 417 (Del. 2020) (“A claim that directors had notice of serious misconduct and simply brushed it off or otherwise failed to investigate states a claim for breach of duty.”); Hoover Indus., Inc. v. Chase, 1988 WL 73758, at *2 (Del. Ch. July 13, 1988) (“A director does breach his duty of loyalty if he knows that the company has been defrauded and does not report what he knows to the board or to
34 Directors and officers breach the duty of loyalty when they abuse human
resources, including by sexually harassing employees or agents of the corporation, as
this court held in McDonald’s.121
McDonald’s arose from the misconduct of the company’s Chief People Officer,
David Fairhurst, who allegedly fostered a corporate culture that condoned sexual
harassment and misconduct. The complaint claimed that Fairhurst and the
company’s CEO turned the company’s headquarters into a den of iniquity, where
executives hosted weekly happy hours and routinely made female employees feel
uncomfortable. Their conduct led to more than a dozen complaints with federal
regulators, a walkout in over thirty cities to highlight the complaints, and a one-day
strike to protest sexual harassment and the company’s failure to address it. Amid
this national corporate crisis over McDonald’s toxic work culture, Fairhurst allegedly
got drunk at a holiday party and harassed a female employee.
After the holiday party, the company docked Fairhurst’s bonus by 50% and
gave him one last chance. Fairhurst then worked with the general counsel and the
board on corrective measures. Fairhurst later left the company after the board
learned of a relationship between Fairhurst and an employee that violated the
company’s anti-fraternization policy.
an appropriate committee of the board, at the very least when he is involved in the fraud and keeps silent in order to escape detection.”). 121 See McDonald’s, 289 A.3d at 380 (“[F]iduciaries violate the duty of loyalty when
they engage in harassment themselves.” (quoting Daniel Hemel & Dorothy S. Lund, Sexual Harassment and Corporate Law, 118 Colum. L. Rev. 1583, 1641 (2018)).
35 The work culture issues that Fairhurst fostered resulted in: the above-
described walk-out and strike; a proxy battle to change the composition of the board;
and a class-action lawsuit in Florida seeking damages for sexual harassment,
retaliation, and related misconduct. In addition, the company initiated a suit against
the CEO to claw back some of his severance package.
In this court, stockholders filed derivative claims against Fairhurst and
members of the McDonald’s board of directors to recover for the harm to the company
resulting from a corporate culture that condoned sexual harassment and misconduct.
The complaint asserted a duty of loyalty claim against Fairhurst and oversight claims
against Fairhurst and the director defendants. The defendants moved to dismiss the
complaint under Court of Chancery Rules 12(b)(6) and 23.1. The court addressed the
motions in three decisions.
The court first tackled Fairhurst’s Rule 12(b)(6) motion. Most of that decision
focused on clarifying that officers owe oversight duties under Caremark. Germane to
this discussion, the court addressed the plaintiffs’ claim that Fairhurst acted
disloyally through his own acts of harassment. The court concluded that “[i]t is not
reasonable to infer that Fairhurst acted in good faith and remained loyal to the
Company while committing acts of sexual harassment, violating company policy,
violating positive law, and subjecting the company to liability. It is reasonable to
infer that Fairhurst acted disloyally and for an improper purpose, unrelated to the
36 best interests of the Company.”122 On this reasoning, the court denied Fairhurst’s
Rule 12(b)(6) motion.
In a second decision, the court granted the director defendants’ Rule 12(b)(6)
motion. The court held that the complaint did not adequately allege a Caremark
claim against the director defendants. Although it was reasonably conceivable that
the director defendants learned of numerous red flags revealing the culture of sexual
harassment and Fairhurst’s own misconduct, the court held that “the complaint does
not support [] an inference that the Director Defendants failed to respond” to the red
flags.123 The decision catalogued the board’s numerous salutary actions intended to
ameliorate the problem once it was surfaced to them.
In a final decision, the court granted the defendants’ Rule 23.1 motion.124
Because the complaint did not state a claim against the director defendants, the
majority of the board did not face a substantial likelihood of liability in connection
with the lawsuit and was not otherwise conflicted. The court thus concluded that the
plaintiff failed to plead demand futility. The effect was that the entire case was
dismissed, even the claim against Fairhurst.
The three McDonald’s decisions demonstrate that sexually harassing
employees can constitute a breach of the duty of loyalty, albeit one that might not
survive a motion to dismiss under Rule 23.1.
122 Id. at 381.
123 In re McDonald’s Corp. S’holder Deriv. Litig., 291 A.3d 652, 662 (Del. Ch. 2023).
124 In re McDonald’s Corp. S’holder Deriv. Litig., 2023 WL 2329711 (Del. Ch. Mar. 01,
2023).
37 b. Credit Glory
A recent decision—Credit Glory—takes a different approach. There, a
stockholder sued on behalf of a company for the harm the company suffered when it
was held liable for $1.6 million for sexual harassment committed by one of its officers.
The stockholder sought to shift the loss from the company to the offending officer by
asserting a derivative claim against the officer for breach of the duty of loyalty. The
court dismissed the claim, reasoning that interpersonal misconduct like sexual
harassment governed by employment law cannot support a claim for breach of
fiduciary duty.125
Credit Glory is distinguishable from this action. Plaintiff here does not assert
a legal claim based on the theory that sexually harassing employees constitutes a
breach of the duty of loyalty. Rather, the active misconduct here is the cover-up and
retaliation. Yet Credit Glory can be interpreted as counseling against: relying on
Delaware corporate law as a “general morality code;”126 derivative claims arising from
“workplace disputes . . . regulated by comprehensive state and federal laws;”127 and
“allowing a stockholder to capitalize on a victims’ personal traumas.”128 Defendants
125 Credit Glory, 2025 WL 3439671, at *5.
126 Defs.’ Supp. Br. at 2 (quoting Credit Glory, 2025 WL 3439671, at *4).
127 Id. at 3.
128 Id. at 4.
38 thus argue that the decision has potential implications for and supports their
dismissal motions.129 Credit Glory, therefore, warrants discussion.
The defendant in Credit Glory was Christopher Lundgren, a director and
officer of the company. Two company employees sued Lundgren for discrimination in
New York state court. The employees also named Credit Glory as a defendant. The
New York court entered judgment against Credit Glory and Lundgren jointly for
$1.35 million, and against Credit Glory and Lundgren individually for $235,000 each.
Excluding attorney’s fees and expenses, therefore, Lundgren’s offenses against
company employees rendered Credit Glory liable for $1.6 million.130
Company co-founder, president, and director Alex Brola filed a derivative claim
on Credit Glory’s behalf to recover the $1.6 million. Brola did not assert oversight
claims. Rather, Brola claimed that Lundgren actively breached the duty of loyalty by
sexually harassing company employees. Lundgren moved to dismiss on various
grounds, including under Rules 23.1 and 12(b)(6). He argued that even though he
and Brola were the only directors, demand was not futile because he did not face a
substantial likelihood of liability from the claims against him. The court granted
Lundgren’s motion, reasoning Lundgren did not face a substantial likelihood of
liability because harassing company employees is interpersonal conduct, governed by
employment law, and cannot support a claim for breach of fiduciary duty.131
129 See generally id. (arguing that Credit Glory has implications on and supports the
motions to dismiss). 130 C.A. 2024-1108, Dkt. 1.
131 Credit Glory, 2025 WL 3439671, at *5.
39 The decision advanced six lines of reasoning.132 The first two addressed
McDonald’s. The court reasoned that, if read to support the notion that sexually
harassing company employees supports a claim for breach of the duty of loyalty, then
McDonald’s constitutes an expansion of Delaware law (the “expansion” argument).
The court next reasoned that reading McDonald’s to support a claim for breach of
fiduciary duty based on interpersonal conduct could lead to “doctrinal sprawl” (the
“sprawl” argument). The third line of reasoning was that employment law preempts
fiduciary duty claims (the “preemption” argument). The fourth was that Delaware
courts should show “comity” to the employment law of other states (the “comity”
argument). The fifth line of reasoning was that to support a fiduciary claim, the
challenged conduct must involve fiduciary powers exclusively and cannot arise from
powers that “any midlevel manager” might hold (the “powers” argument).133 Last,
the court reasoned that treating sexual harassment as a basis for fiduciary violations
would be detrimental to survivors of sexual abuse and thus against public policy (the
“policy” argument).
i. The Expansion Argument
To build the argument that McDonald’s constituted an expansion of Delaware
law, Credit Glory reduced the holding of McDonald’s to a syllogism: “[B]ecause sexual
harassment is selfish, and selfishness is disloyal, then harassment is a breach of the
132 Id. at *6–7.
133 Id. at *5.
40 duty of loyalty.”134 The court then took this logic a step further, stating that it would
result in “strict fiduciary liability for workplace misconduct.”135 The court reasoned
that this would constitute an “expansion” of Delaware law.136
As discussed above, McDonald’s was a fact-specific application of long-settled
principles of Delaware law—that a fiduciary acts in bad faith when the fiduciary
“intentionally acts with a purpose other than that of advancing the best interests of
the corporation.”137
The duty of loyalty has been defined “capaciously” to bind fiduciaries, whatever
the context.138 As retired Chief Justice Strine and his co-authors have explained:
“Because every act of a director must be done for a proper, loyal purpose, every act in
every context implicates the duty of loyalty.”139
134 Id. at *5.
135 Id.
136 Id.
137 Stone, 911 A.2d at 369 (quoting Disney, 906 A.2d at 67).
138 Leo E. Strine, Jr., Lawrence Hamermesh, R. Franklin Balotti, & Jeffrey Gorris,
Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law, 98 Geo. L.J. 629, 633–34 (2010) [“Loyalty’s Core Demand”] (“Because the discretion that the DGCL affords directors is so wide, it is vitally important that directors exercise this discretion to advance the corporation’s best interests and not for improper purposes . . . . [I]t has been traditional for the duty of loyalty to be articulated capaciously, in a manner that emphasizes not only the obligation of a loyal fiduciary to refrain from advantaging herself at the expense of the corporation but, just as importantly, to act affirmatively to further the corporation’s best interests. In this respect, our law has been clear that the duty of loyalty is implicated by all director actions because all such actions must be undertaken in good faith to advance the corporation’s best interests and because directors owe an affirmative obligation to put in a good faith effort to responsibly carry out their duties.”). 139 Id. at 639.
41 A claim for breach of the duty of loyalty examines whether the fiduciary acts
with the intent of advancing the best interests of the corporation, not why the
fiduciary fails to do so. As this court stated in ODN Holding, “[i]t makes no difference
the reason why the [fiduciary] intentionally fails to pursue the best interests of the
corporation.”140 In Guttman, this court explained that “[t]he reason for the disloyalty
(the faithlessness) is irrelevant, the underlying motive (be it venal, familial, collegial,
or nihilistic) for conscious action not in the corporation’s best interest does not make
it faithful, as opposed to faithless.”141 And Chancellor Allen said it best in RJR
Nabisco:
Greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge, or, as is here alleged, shame or pride. Indeed any human emotion may cause a director to place his own interests, preferences or appetites before the welfare of the corporation. But if he were to be shown to have done so, how can the protection of the business judgment rule be available to him? In such a case, is it not apparent that such a director would be required to demonstrate that the corporation had not been injured and to remedy any injury that appears to have been occasioned by such transaction?142
Delaware courts have applied these basic principles across myriad factual
contexts, finding that a fiduciary acts disloyally when: using company resources for
140 ODN Hldg. Corp., 2017 WL 1437308, at *27 (cleaned up).
141 Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003).
142 RJR Nabisco, 1989 WL 7036, at *15.
42 personal reasons;143 embezzling company funds;144 engaging in unauthorized related-
party transactions;145 using material and non-public company information to trade;146
using confidential company information to compete with the company;147 and
usurping corporate opportunities.148
143 See, e.g., Sutherland v. Sutherland, 2010 WL 1838968, at *4–7 (Del. Ch. May 3,
2010) (denying summary judgment against a claim that a defendant breached fiduciary duties by causing the company provide audit services for his personal use). 144 See, e.g., QC Commc’ns Inc. v. Quartarone, 2014 WL 3974525, *11–13 (Del. Ch.
Aug. 15, 2014) (finding post-trial that the defendant breached his duty of loyalty by retaining company sale proceeds for his personal benefit); Smith v. Smitty McGee’s, Inc., 1998 WL 246681, at *2–3 (Del. Ch. May 8, 1998) (finding the plaintiffs stated a claim that a defendant misappropriated company funds for loan payments on his family’s personal properties and personal legal costs). 145 See, e.g., In re InfoUSA, Inc. S’holder Litig., 953 A.2d 963, 999–1000 (Del. Ch.
2007) (finding that the complaint stated a claim for breach of fiduciary duty where the company made payments to the defendants’ personal corporation covering the use of private jets, a private yacht, a personal residence in California, and travel expenses); MGG SPV Duck LP ex rel. Shari’s Rest. Gp., Inc. v. Borgese, 2025 WL 3232791, at *9–10 (Del. Ch. Nov. 19, 2025) (finding the plaintiff stated a claim where company directors approved an intercompany loan to a related business without expectation of repayment). 146 See, e.g., Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949); In re Fitbit, Inc.
S’holder Deriv. Litig., 2018 WL 6587159 (Del. Ch. Dec. 14, 2018) (finding that the complaint stated a claim for breach of fiduciary duty where the defendant allegedly traded with knowledge of the company’s disappointing product development). 147See, e.g., Beard Rsch., Inc. v. Kates, 8 A.3d 573, 601–03 (Del. Ch.), aff’d sub nom. ASDI, Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010) (finding post-trial that an officer-defendant breached the duty of loyalty when he revealed confidential business information to competing companies); Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 854–56 (Del. Ch.), judgment entered sub nom. In re Metro Storage Int’l LLC v. Harron (Del. Ch. 2022) (finding post-trial that the defendant breached his duty of loyalty by sharing confidential company information with a competing company for which he was a consultant). 148 See, e.g., Kates, 8 A.3d 573, 585–87, 603 (finding post-trial that an officer- defendant breached the duty of loyalty when he sought to poach his former company’s clients and employees).
43 The duty of loyalty extends to the misuse of human resources, as multiple cases
of this court have recognized.149 In Sorrento Therapeutics, the court found post-trial
that the defendant acted disloyally by treating administrative employees and
consultants “as resources for himself personally rather than company resources.”150
Similarly, in Guth, the Delaware Supreme Court affirmed this court’s post-trial
decision that a former officer breached his fiduciary duties by using the company’s
money, credit, facilities—as well as personnel—in the furtherance of a competitive
venture.151
These decisions reflect that human resources are company resources. To many
companies, employees are the most important resource. Harming or misusing
corporate resources for selfish purposes can constitute a breach of the duty of loyalty.
So too can misusing human resources for selfish purposes.
149 See, e.g., Guth, 5 A.2d at 510. (holding that “[c]orporate officers and directors are
not permitted to use their position of trust and confidence to further their private interests” and must “refrain from doing anything that would work injury to the corporation”). 150 Sorrento Therapeutics, Inc. v. Mack, 2023 WL 5670689, at *28 (Del. Ch. Sept. 1,
2023). 151 Guth, 5 A.2d at 510; see also Klein v. Wasserman, 2019 WL 2296027, at *7 (Del.
Ch. May 29, 2019) (sustaining a claim for breach of fiduciary duties where the defendant “disregarded [company] protocol by making direct demands on employees, requesting immediate responses, and threatening some employees with adverse employment actions” and noting that at the pleading stage, allegations that the company suffered “internal disruption and corporate instability” as a result of the defendant’s behavior was sufficient); CertiSign Hldg., Inc. v. Kulikovsky, 2018 WL 2938311, at *17 (Del. Ch. June 7, 2018) (finding post-trial that a former director was liable for breach of the duty of loyalty where the director manipulated corporate employees to advance his personal interests through “petty tactics that jeopardized the well-being of CertiSign and its stockholders”); BelCom, Inc. v. Robb, 1998 WL 229527, at *4 (Del. Ch. Apr. 28, 1998), aff’d, 725 A.2d 443 (Del. 1999).
44 McDonald’s demonstrates that just as a fiduciary acts disloyally when
misusing fungible or intangible corporate resources, a fiduciary acts disloyally when
“us[ing] a position of power to harass, intimidate, or assault employees.” 152 In this
way, McDonald’s recognizes what is obvious—fiduciaries who sexually harass
employees and agents do not do so for the purpose of advancing the company’s
interests. And all that can be said of sexual harassment applies with greater force to
drugging, raping, and sexually assaulting employees. Did McDonald’s establish a per
se breach? No, it did not create a categorical rule for sexual harassment. McDonald’s
applied established principles to a slightly different fact pattern than the cases that
came before. It did not expand of Delaware law.
By excluding workplace misconduct that is of a sexual nature from the category
of employee-targeting, entity-harming activities that can give rise to a claim for
breach of fiduciary duty, Credit Glory did what many have cautioned against: exclude
a particular category of motivation and a particular category of harm from the ambit
of the duty of loyalty. In this way, Credit Glory moved Delaware law, not McDonald’s.
ii. The Sprawl Argument
Credit Glory raised a related concern about McDonald’s—that it “lacks a
limiting principle” that could lead to “doctrinal sprawl” and contort corporate law into
some sort of “general morality code” and sexual harassment into a form of “strict
152 McDonald’s, 289 A.3d at 380 (citing Hemel & Lund, supra, at 1641–42 & n.414
(citing Prozinski v. Ne. Real Estate Serve., 797 N.E.2d 415, 423–24 (Mass. App. Ct. 2003) (holding that when an officer “allegedly embarked on a course of sexual harassment of [a] receptionist,” his “placement of his own interests above those of the company he served could be found by a fact finder to constitute an act of disloyalty”)).
45 fiduciary liability.”153 In the words of Credit Glory, “[i]f every self-serving,
reprehensible act by an officer constitutes fiduciary disloyalty, then a breakroom
fistfight, a defamatory social medial post, or theft of office supplies becomes an
internal affairs matter.”154
It is true that Delaware law articulates the duty of loyalty “capaciously.” 155
This is not new. As discussed above, for a fiduciary, “every act in every context
implicates the duty of loyalty.”156 But this longstanding, broad articulation does not
invariably lead to liability, much less threaten strict liability, nor otherwise signal
doctrinal sprawl.
The procedural vehicle through which stockholders pursue fiduciary claims
arising from corporate harm provides a powerful protection against liability. A claim
for corporate harm is a derivative claim. The bedrock principle of Delaware corporate
law is that “directors, rather than shareholders, manage the business and affairs of
the corporation.”157 Litigation assets are like any other assets; the board of directors
controls them.158 But some litigation seeks redress for “harm inflicted upon the
153 Id. at *4–5.
154 Id. at *5. See Defs.’ Supp. Br. at 2 (relying on “general morality code” arguments). 155 Loyalty’s Core Demand, supra, at 634.
156 Id. at 639.
157 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 158 Agostino v. Hicks, 845 A.2d 1110, 1115–16 (Del. Ch. Mar. 2004) (explaining that
“[o]ne corporate power exercised by the board of directors is the conduct of litigation that seeks to redress harm inflicted upon the corporation”).
46 corporation by its officers or directors.”159 Because “directors and officers of a
corporation may not hold themselves accountable to the corporation for their own
wrongdoing, courts of equity have created an ingenious device to police the activities
of corporate fiduciaries: the shareholder’s derivative suit.”160
The derivative suit grants stockholders standing to hold fiduciaries
accountable for fiduciary misconduct that harms the corporation. In this way, a
derivative suit acts as a form of indemnification.161 Just as “indemnification shifts
the burden of loss from the party that suffered it to the party that should bear it,”162
derivative suits shift the burden of loss from the corporation to the disloyal fiduciary.
Holding fiduciaries accountable for misconduct that harms the corporation can
give rise to collateral benefits external to the corporation. For example, requiring
that fiduciaries create a system to monitor legal compliance encourages legal
compliance. That, in turn, benefits the communities that the laws governing the
corporation were intended to protect. To the extent that the system generates these
159 Id. at 1116.
160 Id.; see also Schoon v. Smith, 953 A.2d 196, 201 (Del. 2008) (“To prevent ‘a failure
of justice,’ courts of equity granted equitable standing to stockholders to sue on behalf of the corporation ‘for managerial abuse in economic units which by their nature deprived some participants of an effective voice in their administration.’ The courts reasoned that without equitable standing, ‘stockholders would be without any immediate and certain remedy,’ there would have been a complete failure of justice, and the general principles of equity and fairness would have been defeated. Today, the result of this judicially-created doctrine is known as the stockholder derivative action.”). 161 See Firefighters’ Pension Sys. of City of Kansas City v. Foundation Building Mat’ls,
Inc., 318 A.3d 1105, 1182 (Del. Ch. May 31, 2024). 162 Id.
47 knock-on effects, it is a positive thing.163 But minimizing negative externalities is not
the purpose of a derivative suit; nor is the equitable vehicle of derivative claims
intended to police some “general morality code.”164 Derivative suits serve a very
limited purpose—they provide stockholders standing to pursue claims that shift
losses from the company that was harmed to the fiduciary that harmed it.
There is no shortage of limiting principles protecting fiduciaries from
derivative suits or discouraging stockholders from pursuing them. Procedural
hurdles unique to the derivative suit include: the demand requirement;165 the
contemporaneous ownership requirement;166 the continuous ownership
requirement;167 adequacy standards;168 the threat of being “Walmart-ed”;169 and the
risk of being derailed by a special litigation committee.170 All have the potential to
terminate a case, most at the outset of the litigation.
163 See Leo E. Strine, Jr., Kirby M. Smith, & Reilly S. Steel, Caremark and ESG,
Perfect Together: A Practical Approach to Implementing and Integrated, Efficient, and Effective Caremark and EESG Strategy, 106 Iowa L. Rev. 1885 (recognizing that “scholars have viewed [Caremark] as having enormous value in encouraging more intensive diligence in the area of compliance,” id. at 1897, and arguing that “corporate risk aversion and law compliance efforts under Caremark” overlaps and positively reinforces corporate focus on [employee environmental, social, and governance] issues, id. at 1907). 164 Credit Glory, 2025 WL 3439671, at *5.
165 Ct. Ch. R. 23.1.
166 8 Del. C. § 327.
167 Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984).
168 Ct. Ch. R. 23.1(c).
169 See Cal. State Teachers’ Ret. Sys. v. Alvarez, 179 A.3d 824, 832–33 (Del. 2018).
170 See Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981).
48 The collective action problem in Delaware’s private enforcement system serves
as a further limiting principle. Stockholders rationally lack incentives to foot the full
bill for litigation when they only benefit pro rata from the recovery to the company.171
For this reason, Delaware law allows attorneys to pursue derivative claims on a
contingent basis. A contingent-fee attorney is only rewarded for successful results
and, typically, paid fees proportionate to the degree of success.172 Attorney’s fees are
subject to judicial review. The court thus sets the market for derivative suits,
awarding fees based on the value of the benefit to the company. If an attorney cannot
achieve her hourly rate on a risk-adjusted basis, then there is no market for pursuing
the claim.173
Because contingent-fee attorneys are paid proportionate to the benefits they
confer on the corporation, a contingent-fee attorney has no incentive to pursue claims
challenging infractions that resulted in minor harm. Take a one-off fistfight in the
breakroom. Setting aside the question of whether the fight constitutes a breach of
the duty of loyalty, a plaintiff’s attorney has no incentive to pursue a claim where the
recovery would be minimal. But “Fight Club” in the breakroom? That might pique a
171 See Bird v. Lida, 681 A.2d 399, 402 (Del. Ch. 1996) (observing that “individual
shareholders have little incentive to bear the costs associated with activities the monitor board of director (or management) performance”). 172 See generally In re Dell Techs. Inc. Class V S’holder Litig., 326 A.3d 686, 699 (Del.
2024). 173 See, e.g., Anderson v. Magellan Health, Inc., 298 A.3d 734, 755 (Del. Ch. 2023)
(granting attorney’s fees at a steep discount to movant’s lodestar to “send a signal that these sorts of cases are not worth the attorneys’ time,” and noting that “[w]here lawsuits are not worth much, plaintiffs’ counsel should not be paid much”).
49 contingent-fee attorney’s interest, if the harm to the company was significant enough
to support a fee award worth her time spent remedying it. The same is true of
defamatory social media posts that truly harm the corporation,174 or a major theft of
office supplies. If the harm is significant enough, then there might be a market for
the claim. (For that matter, if the harm is significant enough, the board might cause
the company to pursue the claim directly.)
In all events, persons concerned about a lack of limiting principles post-
McDonald’s need look no further than McDonald’s. The staged way in which the
court decided the motions obscured what should have been the lede: “McDonald’s
Case Dismissed.” As discussed above, the court concluded that the majority of the
board was capable of impartially considering a demand to pursue the claims against
Fairhurst and others. Much of that reasoning turned on the board’s response to
Fairhurst’s actions, which was exemplary, and which undermined any inference of
bad faith or partiality on the part of the board. And to emphasize the point, the court
dismissed the entire case under Court of Chancery Rule 23.1—the claims against the
board as well as the claim against the chief people harasser. Far from strict liability,
McDonald’s involved zero liability.
McDonald’s illustrates the difficulty of pursuing derivative suits and the
extreme limiting principles that minimize the threat of liability arising from them.
It does not threaten doctrinal sprawl.
174 See, e.g., Schnatter v. Shapiro et al., C.A. No. 2018-0646-AGB (Del. Ch.), Dkt. 1 ¶
45 (asserting claims for breach of fiduciary duty against a director who launched a “false and defamatory campaign” against the company’s founder).
50 iii. The Preemption Argument
Credit Glory identified numerous concerns described as “preemption.”175 That
reasoning draws on preemption doctrine by means of analogy, because no federal or
state employment law preempts a stockholder from bringing derivative claims for
breach of fiduciary duty based on workplace misconduct. This category of concerns
broadly conveyed two sentiments. First, the decision described the derivative suit as
an unnecessary form of “second” remedy duplicative of the first remedy sought by the
survivor of the sexual misconduct.176 Second, the decision stated that permitting
derivative claims based on violations of employment law would “authorize an end-
run around” a series of employment statutes, “allowing stockholder plaintiffs to
bypass requirements that bind actual victims.”177
Viewing a derivative suit as a duplicative form of “second” recovery ignores its
indemnification-like purpose and conflates harm to the survivor with harm to the
corporation. Vice Chancellor Zurn captured the distinction between types of harm in
Boeing:
The primary victims of the crashes are, of course, the deceased, their families, and their loved ones. While it may seem callous in the face of their losses, corporate law recognizes another set of victims: Boeing as an enterprise, and its stockholders. The crashes caused the Company and its investors to lose billions of dollars in value. Stockholders have come to this Court claiming Boeing's directors and officers failed them in overseeing mission-
175 Credit Glory, 2025 WL 3439671, at *5–6.
176 Id. at *1.
177 Id. at *6. See Defs.’ Supp. Br. at 3–4 (relying on preemption argument).
51 critical airplane safety to protect enterprise and stockholder value.178
The same is true here. What Credit Glory calls the “second” remedy is the first and
only remedy for the corporation. Preemption does not foreclose that remedy.
Nor is the existence of employment laws a basis to preempt derivative actions.
The Federal Aviation Administration regulates airplane safety, yet the existence of
those regulations did not preempt the derivative action in Boeing.179 The U.S. Food
and Drug Administration regulates ice cream, yet the existence of those regulations
did not preempt the derivative action in Marchand.180 Anti-money laundering and
know-your-customer laws regulate banks, yet the existence of those regulations did
not preempt the derivative action in Stone.181 To the contrary, it was the existence of
those laws and regulations, and the injury resulting from fiduciary-caused violations,
that the derivative claims sought to remedy. So too with employment law.
The second issue—the end-run issue—is a real concern, but it is a practical
problem for which this court has solutions. Often, a prior or parallel lawsuit forms
the basis for a derivative claim—a securities action, a criminal investigation, or a
state regulatory proceeding, for example. Here, it is the survivors’ anti-trafficking
suits. To avoid end-running the discovery and procedural rules governing the
178 In re Boeing Co. Deriv. Litig., 2021 WL 4059934, at *1 (Del. Ch. Sept. 7, 2021).
179 Boeing, 2021 WL 4059934, at *25–26.
180 212 A.3d 805 (Del. 2019).
181 911 A.2d 362 (Del. 2006).
52 underlying action, this court has the discretion to stay the derivative action pending
resolution of “related actions involving the same events or conduct.”182
The fact of parallel litigation does not preempt a stockholder’s ability to bring
a derivative suit. It is often the reason for bringing the derivative suit, and this court
has tools for managing litigation in a way that avoids undermining the integrity of
the underlying proceeding.
iv. The Comity Argument
Credit Glory also cited “comity” as a basis for dismissal.183 The court wrote
that “the internal affairs doctrine and comity principles underlying it foreclose Brola’s
attempt to recast employment disputes as breaches of fiduciary duty. Under that
doctrine, Delaware law governs the relationships between corporate owners and
182 See, e.g., In re Duke Energy Corp. Coal Ash Deriv. Litig., 2015 WL 5135066 (Del.
Ch. Aug. 31, 2015) (staying derivative suit pending resolution of several regulatory enforcement actions); see also South v. Baker, 62 A.3d 1 (Del. 2012); Brenner v. Albrecht, 2012 WL 252286, at *7 (Del. Ch. Jan. 27, 2012) (staying derivative proceedings pending outcome of securities class action); Brudno v. Wise, 2003 WL 1874750, at *5 (Del. Ch. Apr. 1, 2003) (staying derivative proceeding “[g]iven that the overwhelming thrust of the Delaware Action complaint is a demand for indemnification largely for harm to be incurred by [the corporation] in the Federal Securities Action, the sensible ordering of events is for the Federal Securities Action to proceed first”); In re Massey Energy Co., 2011 WL 2176479, at *27 (Del. Ch. May 31, 2011) (“[T]he plaintiffs, as fiduciaries for other Massey stockholders, [should] be reluctant to prosecute the Derivative Claims they claim are so valuable until the direct claims against Massey are resolved. . . . Thus, the Derivative Claims should follow, rather than precede, the resolution of the key direct suits and regulatory proceedings.”). This approach also tracks with viewing a derivative suit as a form of indemnification–a claim that ripens when the “a loss triggering the indemnification obligation has been established.” Foundation Building Mat’ls., 318 A.3d at 1183. 183 Credit Glory, 2025 WL 3439671, at *6.
53 managers. It does not reach interpersonal matters occurring within other states’
borders.”184
Recast as a comity issue, this line of reasoning seems to rest on the same
premises that infect the others. It too conflates law governing the treatment of
employees with the indemnification function of derivative suits. It too categorically
excludes employment matters from the scope of conduct that can give rise to fiduciary
harm. It too ignores practical ways in courts routinely avoid infringing on rules and
procedures governing the underlying litigation. Indemnification-oriented derivative
actions do not implicate comity concerns.
v. The Powers Argument
Credit Glory posits that actions taken for “personal gratification” are not
corporate acts because they do not involve the use of fiduciary powers.185 The decision
distinguished McDonald’s on the ground that “the defendant was a senior officer
charged with maintaining a safe and respectful workplace at the enterprise level.”186
The court reasoned that if “any midlevel manager could commit the same wrongs,”
then the wrong cannot give rise to a breach of fiduciary duty.187
To the extent this action implicates the powers argument, it too injects new
considerations into fiduciary law.188 Consider embezzlement cases, Brophy claims,
184 Id. (emphasis added).
185 Id. at *5 & n.46.
186 Id. at *5.
187 Id.
188 Plaintiff argues that this action does not appear to implicate the powers argument
because Plaintiff alleges that Sanford was able to cover up the misconduct and
54 related-party transaction challenges, or any of the cases involve the misuse of a
corporate jet or yacht.189 None of them ask whether the fiduciary had oversight
responsibilities covering the precise wrong, or whether midlevel managers had access
to the same funds, information, negotiation opportunities, or other resources. They
all focus on whether the fiduciary-defendant acted contrary to the best interests of
the corporation.
The usurpation cases provide perhaps the starkest example. In Guth,190 the
Delaware Supreme Court affirmed this court’s post-trial decision finding that a
former officer breached the duty of loyalty by usurping a corporate opportunity. In
his defense, the officer argued that the opportunity came to him in a purely personal
capacity, and that a fiduciary has no obligation to refrain from pursuing opportunities
presented to him in a personal capacity.191
The high court rejected this argument, reasoning that “[t]he real issue is
whether the opportunity . . . was so closely associated with the existing business
activities of Loft, and so essential thereto, as to bring the transaction within that
class of cases where the acquisition of the property would throw the corporate officer
retaliate against the whistleblower by virtue of his fiduciary powers. See generally Pl.’s Supp. Br. at 5–6. 189 See, e.g., Sutherland, 2010 WL 1838968, at *4–7; QC Commc’ns Inc., 2014 WL
3974525, at *11–13; InfoUSA, Inc., 953 A.2d 963, 999–1000; Fitbit, 2018 WL 6587159; Smitty McGee’s, Inc., 1998 WL 246681, *at 2–3; Sorrento Therapeutics, 2023 WL 5670689, at *28. 190 5 A.2d 503, 510 (Del. 1939).
191 Id. at 512 (“It is urged by the appellants that Megargel offered the Posi-Cola
opportunity to Guth personally, and not to him as president of Loft.”).
55 purchasing it into competition with his company.”192 Put differently, the question
was not whether the officer was presented with the opportunity in a personal
capacity, or even whether the officer could pursue it independent of the company.
Rather, the question was whether the opportunity placed the fiduciary in conflict with
the corporation. The court held corporate officers and directors must “refrain from
doing anything that would work injury to the corporation,” no matter how that
opportunity came to the fiduciary.193
This decision does not draw on Guth directly. Neither Credit Gory nor this
action involve claims of usurpation. But there are lessons from usurpation cases. If
fiduciary principles do not permit a corporate officer to seize a corporate opportunity
for himself even if it came to him in a personal capacity, why would fiduciary
principles allow a corporate officer to abuse an employee of the company so long as
he did not use powers uniquely derived from his fiduciary position? The law does not
look to the powers used when harming the corporation. The law looks at whether the
person was a fiduciary and his motives when doing so. The capacity argument is
another new move advanced for the first time in Credit Glory.
vi. The Policy Argument
Last, the Credit Glory court advanced the following policy argument:
[T]reating sexual harassment-based claims as corporate assets creates perverse incentives. It risks commodifying personal trauma, forcing it into public derivative litigation that lacks the privacy protections of employment statutes.
192 Id. at 513.
193 Id. at 510.
56 Equity must not sanction collateral litigation that exposes victims to unwanted scrutiny in the service of a corporate recovery and attorneys’ fees.194
This statement reflects the commendable desire to protect survivors of sexual
assault.195
Translating that desire into corporate-law policy for limiting derivative suits,
however, is irregular. Personal traumas often undergird corporate traumas that
derivative suits seek to remedy, as derivative suits involving human fatalities show.
Yet this court has never expressly considered the effects of the derivative suit on
traumatized non-parties when resolving a motion to dismiss.196
Moreover, reasonable minds can differ about how to best protect survivors. It
is true that there is something about sex-based issues that make people want to treat
them differently.197 Embezzlement can give rise to both employment law and
194 Credit Glory, 2025 WL 3439671, at *7.
195 See Defs.’ Supp. Br. at 3–4 (relying on the Credit Glory policy argument); Pl.’s
Supp. Br. at 9–10 (denying the existence of perverse incentives in this case, noting that “[t]he witnesses . . . relied on in the Complaint were the Whistleblower (who is a former Board member) and two former employees with personal knowledge . . .” and “[t]o the extent any aspect of this case relies upon victims’ accounts of sexual misconduct, the survivors have already come forward in federal court proceedings[.]”). 196 See, e.g., Marchand, 212 A.3d 805; Boeing, 2021 WL 4059934; In re Gen. Motors
Co. Deriv. Litig., 2015 WL 3958724 (Del. Ch. June 26, 2015), aff’d, 133 A.3d 971 (Del. 2016). One set of scholars has argued that this court should consider the effects of corporate action on human life when analyzing derivative suits. But they do not argue for dismissing those suits. Rather, they argue that derivative suits gain greater significance the greater the threat to human life. See Robert E. Bishop & Frank Partnoy, Corporate Oversight & Risk to Human Life (2026) (unpublished manuscript). 197 See Aya Gruber, Sex Exceptionalism in Criminal Law, 75 Stan. L. Rev. 755, 821–
24 (2023) (discussing the sex-blinders phenomenon and observing that “[s]ex has the
57 fiduciary issues, yet no one recoils at that combination. Workplace sexual misconduct
often inspires a different reaction. Should it? Is sex-based harm categorically
different from other causes of corporate harm? Should Delaware provide a fiduciary
cause of action for taking money (embezzlement) or tangible property (theft) but not
for an encroachment tied to a person’s sex? On what basis would Delaware law
exclude this conduct as a source of derivative claims?
Credit Glory identified one basis grounded in a concept discussed in feminist
theory—commodification. Other concepts discussed in feminist theory might direct
a different outcome. Some might argue that agency and voice weigh in favor of
allowing survivors to self-determine whether claims for breach of fiduciary duties
that promote good corporate governance are best for them. Others might cite
problems with sex exceptionalism as a knock against the categorical exclusion of sex-
based misconduct from fiduciary claims.
There are undoubtedly many unexplored applications of feminist theory to
corporate law. And this is the sort of interesting issue that academics can and should
debate. But judges should resist the urge. This court’s subject-matter expertise has
its limits. And even one who agrees with the outcome of Credit Glory must agree that
members of this court should not be balancing competing feminist theories when
resolving motions to dismiss derivative actions.
amazing ability to induce an acute form of analytic myopia in even the most thoughtful of analysts”).
58 In the end, the Court of Chancery Rules offer many privacy-related procedural
protections for non-parties,198 and those protections have been effectively deployed to
protect a variety of sensitive information and minimize burdens on non-parties,
including survivors. This court need not eliminate an entire cause of action to
accomplish what can be achieved through procedural safeguards.
vii. Conclusion Regarding Credit Glory
Effectively, Credit Glory argues for changing Delaware law to exclude a single
type of workplace misconduct from the activities that can give rise to fiduciary breach.
No Delaware case has ever done this. No identified Delaware policy supports it. No
doctrine of preemption or comity demands it. And that outcome conflicts with at least
one well-reasoned decision of this court. The court thus declines Defendants’ request
to follow Credit Glory. If Credit Glory reflects a split in Delaware law, that does not
render Delaware law unpredictable. Reasonable trial judges can differ in their
conclusions. Resolving those differences is a function of the appellate process. 199
198 See, e.g., Ct. Ch. Rule 5.1 (governing confidential filings); Ct. Ch. R. 45(c)(1) (establishing protections for persons subject to subpoenas). 199 In support of their motion to dismiss the claims of retaliation, Defendants rely on
footnote 41 in Credit Glory. Defs.’ Supp. Br. at 5 (citing Credit Glory, 2025 WL 3439671, at *5 n.41). Footnote 41 states that no Delaware decision created “a rule that a viable breach of fiduciary duty claim arises whenever an officer engages in unlawful harassment.” Credit Glory, 2025 WL 3439671, at *4 n.41. For that proposition, Credit Glory cites to Personal Touch Holdings Corp. v. Glaubach, 2019 WL 937180, at *25 (Del. Ch. Feb. 25, 2019). Personal Touch did not involve a claim that sexual harassment constituted a breach of fiduciary duty. It cited a New York case that addressed the issue, which it did not comment on or endorse, and which did not apply Delaware law. See id. at *25 n.299 (citing Pozner v. Fox Broad. Co., 74 N.Y.S.3d 711, 713–14 (N.Y. Sup. Ct. 2018)); see also McDonald’s, 289 A.3d at 381 n.25 (discussing and distinguishing Pozner).
59 c. Conclusion Regarding The Active-Misconduct Claim
Plaintiff alleges that, for self-interested reasons, Sanford covered up reports of
drugging and sexual assault by withholding assault-related information from other
Board members and by ousting the Whistleblower.
As for Sanford’s role in the cover-up, the Complaint alleges that Sanford knew
of the illegal conduct and struck a deal to retain Golden so that Gove, a top Influencer
in Sanford’s downline,200 would remain with the Company.201 Sanford allowed
Golden to stay at the Company until February 2023, when his share incentive
package vested. Sanford approved Bjorkman’s “Accelerated Compensation
More relevant here, Credit Glory describes Personal Touch as “holding that a director’s ‘troubling’ and ‘improper[r]’ retaliation against employees who complained of harassment did not breach the duty of loyalty because the conduct, though directed at the employees, was not motivated by an intent to harm the corporation or obtain a personal financial benefit.” Id. (emphases added). That was not the holding of Personal Touch. The claim for breach of fiduciary duties in Personal Touch challenged two distinct categories of conduct: (i) the defendant’s alleged retaliation against employees who complained about sexual harassment; and (ii) the director’s alleged “inflammatory” interactions with other board members. Id. at *23 (emphasis added). The court held that the plaintiff failed to prove the first theory—that of retaliation—because the defendant “never threatened to fire [the employee] or to harm her in any way after” she reported him for sexual harassment. Id. at *24. The court commented that the defendant acted “improperly” to make the employee “feel uncomfortable,” and that aspects of his behavior were “troubling,” but concluded that “[t]he record evidence of retaliation [was] limited.” Id. at *24–25. The court also rejected the second theory. The court found that the whole of the defendant’s conduct “although uncivil, was motivated by a genuinely held belief on his part that Personal Touch was being mismanaged and a sense of frustration that his fellow directors were ignoring concerns he had been expressing to them for many months about the Company’s management.” Id. at *24. Thus, Personal Touch does not support excluding retaliation for reports of sexual harassment as a basis for fiduciary breach. 200 Compl. ¶¶ 86–87, 150.
201 Id. ¶ 87.
60 Agreement” and Conord’s compensation package with knowledge of their sexual
misconduct and the reasons for their termination.202 And Sanford declined to
nominate the Whistleblower for reelection, although he had previously planned to do
so, after the Whistleblower came forward to report the sexual misconduct.
This is all reasonably conceivable. It is reasonably conceivable that Sanford
actively covered up acts of rape and sexual assault, refused to report that information
to the Board, and retaliated against the person who did. It is therefore reasonably
conceivable that Sanford breached his duty of loyalty to the company.
Count II states a claim.
2. Claim That Defendants Breached Their Oversight Obligations
There are “two possible paths for a plaintiff to plead a claim for breach of the
duty of oversight”: “by alleging that the board lacked the requisite information
system and controls,” an “information-systems claim;” and “by alleging that the
board’s information system generated red flags indicating wrongdoing to which the
directors failed to respond,” a “red-flags claim.”203 Plaintiff advances both theories.
Because Plaintiff has adequately alleged a “Red-Flags Claim,” Count II states a claim,
and this analysis does not reach Plaintiff’s information-systems claims.
A red flag for Caremark purposes informs the fiduciary of a central compliance
risk.204 A red flag can arise from internal or external sources. Either way, corporate
202 Id. ¶ 151.
203 McDonald’s, 291 A.3d at 676.
204 Marchand, 212 A.3d at 824; McDonald’s, 289 A.3d at 376.
61 fiduciaries “ha[ve] an obligation to respond.”205 “[C]orporate fiduciaries who are
aware of harassment but fail to react . . . may be sued for breach of the duties of care
and loyalty.”206
Plaintiff alleges, and Defendants concede, that the Board was aware of the
sexual misconduct at least as late as April 2022, when Agent Five emailed the Board
to request a change of sponsorship and the Whistleblower proposed concrete steps for
addressing the misconduct. And Plaintiff alleges, and Defendants do not dispute that
the misconduct at issue—the harassment, drugging, assault, and rape of real estate
agents in a real estate company—posed central compliance risk.207 Instead,
Defendants argue that the Board was unaware of the issues prior to receiving the
email, that the email did not alert the Board to the full scope of the misconduct, and
that the Board took action in response and did so in good faith.
The parties’ competing positions raise three issues: First, did the Board receive
any red flags of the harassment, drugging, assaults, and rapes before April 2022?
Second, was the April 2022 communication a red flag? Third, did the Board respond
in good faith before the first anti-trafficking suit?
205 McDonald’s, 291 A.3d at 680.
206 Id. at 676; see also AmerisourceBergen Corp., 2020 WL 132752, at *20 (“A claim
that directors had notice of serious misconduct and simply brushed it off or otherwise failed to investigate states a claim for breach of duty.”). 207 Nor do Defendants dispute that harassing, drugging, assaulting, and raping real
estate agents raised “mission critical” risk for a real estate company. See Marchand, 212 A.3d at 824 (using “mission critical” language).
62 First, it is reasonably conceivable that the Board received red flags before April
2022.
In September 2020, an eXp agent posted on Facebook that she had been
drugged at an eXp recruiting event. The post went viral. Hundreds of people
commented on the post, including seven other women who stated that they too had
been drugged and sexually assaulted at eXp events. Defendants argue that it is
unreasonable to infer that any director learned about this post or its contents. The
Company is large, they say. A director cannot keep track of each agent’s social media
account, they argue. Those positions resonate and are sensible. But this social media
post was not some everyday status update, GIF, or meme. This post accused a top
eXp Influencer of drugging and raping an eXp recruit at an eXp event. And in
response to the post, many other women stated that they had the same experience.
Shortly after the post, top-agent Bjorkman was arrested and eXp terminated his
contract. It is hard to believe that no one thought to tell any of the eXp Board
members about the accusations in the post, Bjorkman’s arrest, or the reasons for
Bjorkman’s termination. But it is true, as Defendants note, that no Board nor Board
committee meeting minutes reflect discussion of the September 2020 incidents.
In October 2020, an eXp agent sent an eleven-page memorandum describing
Golden’s and Bjorkman’s pattern of drugging, raping, and sexually harassing agents.
They were also blackmailing the victims, she explained. The memo detailed at least
seven incidents of this behavior and identified Bjorkman and other agents who
sexually harassed her personally. The agent sent the memo to three executives,
63 including then-CEO Gesing, who was also on the Board. Although the CEO received
and extremely detailed memo of extraordinarily illegal and immoral behavior
implicating multiple eXp Influencers, Defendants insist that it is not reasonable to
infer that he reported that information to the Board. And it is true, as Defendants
note, that there are no Board or Board committee meeting minutes reflecting
discussion of this incident.
In these circumstances, the lack of any mention of the sexual misconduct issues
in Board or committee minutes does not obviate the inference that the board was
made aware of the issues. This is true particularly given that the Complaint alleges
that the Whistleblower raised the issues with the Board in early 2021. Defendants
contend that all the allegations attributed to the Whistleblower should be
disregarded because they are not adequately particularized. For Rule 12(b)(6)
purposes, a plaintiff need not plead particularized allegations. Particularity matters
only as to the demand futility analysis, as discussed below. But these are
particularized in any event, as also discussed below.208
Second, it is reasonably conceivable that the April 2022 communication was a
red flag.
Defendants argue that Agent Five’s April 20, 2022 email to the full Board was
not a “red flag” because it contained only “conclusory rhetoric.”209 But the email
208 See Legal Analysis § II.B, infra.
209 eXp Opening Br. at 38 (citing Rojas v. Ellison, 2019 WL 3408812, at *11 (Del. Ch.
July 29, 2019)).
64 states that “Rophynol[,] the rape drug” is “part of the eXp corporate culture” and
references “sexual harassment” and “drugging” of eXp agents.210 She names four
other agents to whom she escalated the sexual assault issues to and who did nothing,
some of whom were named in the October 2020 memorandum as having participated
in sexual harassment and assaults.211 And she refers to multiple women who had
similar experiences at specific, identified, events.212 This is not conclusory rhetoric.
It is the sort of communication that a board should take seriously. Even if the board
viewed the email as conclusory, it might consider asking for more detail.
Defendants’ contention that the email describes no “ongoing” incident is
similarly specious.213 The email urges the Board to take action to “make a difference”
regarding the present problems of sexual harassment and a “rape drug” “corporate
culture.”214 The communication identified alleged perpetrators who, at the time, were
still agents with the Company. And the communication highlighted Agent Five’s
inability to report upward without being silenced or retaliated against. The email
constituted a red flag of an ongoing issue.
Third, it is reasonably conceivable that the Board failed to respond to red flags.
Defendants point to three responses by the Board to argue that it is
unreasonable to infer that the Board failed to respond: the Board terminated
210 Agent Five Email Commc’ns at eXp_0820C.
211 Id.; compare id., with Anonymous Memorandum at 1.
212 Agent Five Email Commc’ns at eXp_0826C.
213 eXp Opening Br. at 38.
214 Agent Five Email Commc’ns at eXp_0820C.
65 Bjorkman’s employment in September 2020; launched an internal investigation at
some point after April 2022; and suspended Golden in February 2023.215 But these
responses are so weak as to support the inference of a bad-faith decision not to take
meaningful action, not the opposite.
When the Board “terminated” Bjorkman, it allowed him to continue getting
paid and to continue selling real estate, and declined to fire his alleged accomplice,
Golden.216 The Board launched the internal investigation almost two years after the
Board knew of the misconduct. That investigation was led, against the advice of
outside counsel, by two individuals who were involved in the decision to reject Agent
Five’s sponsorship change request.217 And the Board took no action against Golden
for more than two years, despite knowing of Golden’s misconduct in fall 2020, only
terminating his contract after the first anti-trafficking suit was filed and Golden
entered vested status.218
Defendants also point to changed policies as countervailing facts
demonstrating a good faith response. To support their contention that eXp adopted
new policies and procedures, Defendants rely on a single statement in the Complaint
asserting that eXp “used an anonymous email system” after “allegations of sexual
assault surfaced.”219 But the next statement in the Complaint explains that the
215 Compl. ¶ 82.
216 Id. ¶¶ 82–84.
217 Id. ¶¶ 82, 123.
218 Id. ¶¶ 48–55, 82.
219 Compl. ¶ 36; see eXp Opening Br. at 16, 42.
66 anonymous email system was for employees, not agents.220 Human Resources and
eXp’s Director of Diversity and Employee Success were not “allowed to know the
process for anonymous emails” and were not able to process complaints from
agents.221 And the Complaint asserts that few agents knew about the email reporting
system, and those who were aware stated that they did not trust it.222 Indeed, the
Complaint alleges that neither Human Resources nor eXp’s Director of Diversity and
Employee Success was permitted to intervene to process anonymous complaints. In
essence, Defendants ask the court to draw inferences concerning changed policies to
contradict what Plaintiff has alleged, but the court must do the opposite on a motion
to dismiss.
In the end, as alleged, the Board changed no eXp policy, enacted none of the
Whistleblower’s suggestions for reform, ignored outside counsel’s advice, and took no
meaningful steps to address the systemic problem of rape at eXp. It is reasonable to
infer that the Board effectively did nothing in response to the Company-wide
allegations of drugging, rape, and sexual assault at the heart of the red flags.
220 Compl. ¶ 36.
221 Id. ¶¶ 36, 38.
222 Id. ¶ 36.
67 The Board’s effective inaction distinguishes this case from the authorities on
which Defendants rely: McDonald’s,223 Corbat,224 Clem,225 GoPro,226 TransUnion,227
Qualcomm,228 and Abney.229 Defendants’ authorities involved significant and timely
responses to the alleged red flags.
In McDonald’s, the court found that the complaint failed to state a viable
oversight claim because the board took action within a month of being on notice of
red flags and made many changes at the enterprise level.230
In Corbat, the documents incorporated by reference in the complaint explained
that the “board and its various committees oversaw significant efforts” to comply with
the law where red flags were waved.231
In Clem, the board resolved unlawful billing practices within months of
223 291 A.3d 652 (Del. Ch. 2023).
224 Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240 (Del. Ch.
Dec. 18, 2017). 225 Clem v. Skinner, 2024 WL 668523 (Del. Ch. Feb. 19, 2024).
226 In re GoPro, Inc., 2020 WL 2036602 (Del. Ch. Apr. 28, 2020).
227 In re TransUnion Deriv. S’holder Litig., 324 A.3d 869 (Del. Ch. 2024).
228 In re Qualcomm Inc. FCPA S’holder Deriv. Litig., 2017 WL 2608723 (Del. Ch. June
16, 2017). 229 Horman v. Abney, 2017 WL 242571 (Del. Ch. Jan. 19, 2017).
230 McDonald’s, 291 A.3d at 683. The board’s action included (i) updating its anti- harassment policy, (ii) engaging the Rape, Abuse & Incest National Network to advise the company, (iii) creating a new hotline and training programs after a comprehensive review, (iv) conducting a cultural assessment, (v) creating a new franchisee guide with best practices for establishing and maintaining a successful workplace, and (vi) ending the Company’s policy requiring mandatory arbitration of harassment and discrimination claims. 231 Corbat, 2017 WL 6452240, at *16.
68 learning of a whistleblower action, and the audit committee reported updates to the
board in the meantime.232
In GoPro, the board recalled a defective product mere days after online videos
showed the defect.233
In TransUnion, the court rejected the plaintiffs’ red-flags theory because the
board took action “almost immediately” to comply with the CFPB’s consent order and
did so in accordance with advice from outside counsel.234 Where there were
outstanding issues that took time to be resolved, the board oversaw management’s
efforts to make improvements and received regular updates about those efforts. 235
And in Qualcomm and Abney, the court rejected claims where the very red
flags that the plaintiffs argued were waved in front of the board—notably, audit
committee reports—also described the board’s planned remedial action.236
Plus, both Clem and GoPro involved discrete products and practices where
termination or recall could validly constitute the entirety of a fulsome response.
Here, the Complaint alleges the Board knew by 2021 that there were dozens of
participants in the assaults of agents and recruits that Bjorkman and Golden had
232 Clem, 2024 WL 668523, at *9–11.
233 GoPro, 2020 WL 2036602, at *13.
234 TransUnion, 324 A.3d 869, 888–90 (Del. Ch. 2024)
235 Id. at 891.
236 Qualcomm, 2017 WL 2608723, at *3–4 (Del. Ch. June 16, 2017); Abney, 2017 WL
242571, at *13–14 (finding that audit committee presentations identifying problematic compliance activity also laid out remedial actions).
69 drugged.237 It strains credulity to suggest that terminating a single individual,
without at least attempting to identify other perpetrators or the circumstances
surrounding the criminal and tortious conduct, could reasonably be classified a good-
faith response that merely failed to hit a target.238
According to the Complaint, the Board here knew of people within the
Company, like Golden, who were directly responsible for pervasive drugging, rape,
and sexual assault. The Board chose to not to address the issue for years, terminating
Golden only after survivors filed federal anti-trafficking suits and Golden’s revenue
sharing rights had vested. The Board refused outside counsel’s advice to conduct an
independent investigation. And the Board approved Conord’s retirement, which was
prompted by his own sexual misconduct, on false pretenses and then allowed him to
rejoin the Company. Just as Caremark imposes a “bottom-line” requirement
concerning information systems,239 Caremark imposes a bottom-line requirement to
respond in good faith to red flags of central legal risks. At a minimum, efforts to
respond to red flags are not 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. All of that is reasonably conceivable here.
Count III states a claim.
237 Compl. ¶ 29.
238 Defendants also cite Shabbouei v. Potdevin, 2020 WL 1609177 (Del. Ch. Apr. 2,
2020), but that case did not involve a Caremark claim. Id. at *7. 239 Marchand, 212 A.3d at 821; see also Boeing, 2021 WL 4059934, at *25, *33.
70 3. Claim That The Control Group Breached Its Oversight Obligation
Plaintiff claims that the Control Group members (Sanford, Frederick, and
Gesing) breached their fiduciary duties in two ways. In the Complaint, Plaintiff
alleges that the Control Group breached information-system and red-flag oversight
obligations.240 According to Plaintiff, the Control Group “could have wielded [its]
control over eXp’s Board and management to address these very serious issues and
minimize the likelihood of ‘serious injury to the corporation,’” but failed to do so.241
In briefing and argument, Plaintiff advances a second theory by recasting allegations
of intentional misconduct specific to Sanford—for example, that Sanford actively
covered up reports of sexual misconduct—as allegations against the Control Group.
Plaintiff’s first theory requires that the group members comprised a group that
exerted general control over the Company and owed oversight obligations. The
Control Group members do not dispute at this stage that they comprised a group that
exerted general control over the Company and owed fiduciary duties. They argue
that controllers do not owe oversight duties.242
No Delaware case has concluded that controllers owe oversight duties in their
controller capacity.243 As the basis for their claim that controllers owe oversight
obligations, Plaintiff relies on the premise that controllers owe the same fiduciary
240 Compl. ¶ 176.
241 Dkt. 43 (“Pl.’s Answering Br.”) at 52–53 (quoting McDonald’s, 291 A.3d at 680). 242 See Dkt. 28 (“Gesing Br.”), Section II. 243 See Schertz v. Garcia, C.A. No. 2023-0600, Dkt. 48 at 26:4–20 (Del. Ch. Sept. 25,
2024) (TRANSCRIPT) (discussing this issue generally).
71 obligations as directors. For that proposition, Plaintiff cites a footnote in this court’s
decision in McRitchie v. Zuckerberg, stating:
Delaware cases have equated the duties of stockholder controllers with those of directors.244 When a stockholder controller exercises board-level control, takes over the corporate machinery, and effectively substitutes its wishes for those of the board of directors, then the proposition of fiduciary equivalence is accurate.245
The cited footnote, however, concludes that “a careful review of Delaware precedent
indicates that stockholder controllers do not always owe the same duties as
directors.”246 The footnote cites Sears, where Vice Chancellor Laster conducted that
careful review.
Sears involved a claim that a controller breached his fiduciary obligations by
taking action by written consent to prevent a board-approved liquidation.247 The
court conducted a scholarly analysis of the nature and scope of controller obligations
in two common scenarios: first, when the controller exercises stockholder-level power
to sell or vote; and second, when the controller uses “its influence over the board and
management to wield corporate power indirectly and cause the corporation to act.”248
244 315 A.3d 518, 533 n.12 (Del. Ch. 2024) (collecting cases).
245 Pl.’s Answering Br. at 53 (quoting Zuckerberg, 315 A.3d at 533 n.12). 246 Zuckerberg, 315 A.3d at 533 n.12 (citing In re Sears Hometown & Outlet Stores,
Inc. S’holder Litig., 309 A.3d 474, 500 (Del. Ch.), modified on reargument, (Del. Ch. 2024)). 247 Sears, 309 A.3d at 483.
248 Id. at 506–07.
72 Sears involved the first scenario—a challenge to a controller’s exercise of stockholder-
level power—which is where the court’s analysis focused.
To dramatically oversimplify a thorough discussion, the court observed that
the historical starting point for control obligations is that stockholders have “no duty”
to sell and no duty to vote, even when failing to do so would harm the minority.249
Rather, a controller can only be liable after having decided to sell or when exercising
voting power, and only then when acting affirmatively to change the status quo.250
Sears thus articulated a theory of Delaware law that restricts the scope of a
controller’s obligations compared to those of a director. A controller owes limited
fiduciary obligations only when affirmatively exercising its stockholder power to
change the status quo. A director owes the full panoply of fiduciary duties in all
circumstances. Thus, here, to the extent that Plaintiff’s theory rests on the simplified
statement of Delaware law that controllers owe the same fiduciary duties as
directors, it fails under the persuasive reasoning of Sears. Controllers do not owe the
same scope of fiduciary obligations as directors.
Plaintiff’s theory of controller liability also fails to the extent that Plaintiff
challenges the Control Group’s failure to use its stockholder-level powers. Sears
explains that stockholder-level action can only give rise to fiduciary duties when
wielded affirmatively, and only then in limited circumstances. Oversight obligations,
249 Id. at 508.
250 Id. at 510.
73 by contrast, impose liability for inaction. Thus, stockholder-level power can never
give rise to fiduciary oversight obligations.
Perhaps for this reason, Plaintiff draws on the second Sears scenario, arguing
that the Control Group had the ability to use “its influence over the board and
management to wield corporate power indirectly and cause the corporation to act.”251
Sears states that: “Having effectively moved into the boardroom, the controller
becomes subject to the same fiduciary standards that apply to directors.”252 Plaintiff
thus argues that, having moved into the boardroom, the Control Group owes the same
fiduciary duties as directors.
For the proposition that this second scenario giving rise to control duties
creates duties coterminous in scope with those of directors, Sears cites to authorities
that involved or contemplated some action by the controller—“exercis[ing] corporate
power,” “directing the actions of the corporation,” “imposing its policy upon” the
corporation, and “caus[ing] specific corporate action.”253 And by articulating the
scenario as one where the controller “indirectly . . . cause[s] the corporation to act,”
Sears suggests that the second scenario, like the first, gives rise to fiduciary duties
only when the controller takes action.254 But because the facts of Sears did not
challenge controller conduct that relied on board-level control, the court did not
251 Id. at 506.
252 Id.
253 Id. at 506 n.14.
254 Id. at 506 (emphasis added).
74 elaborate on this language one way or another. The open question is thus whether a
controller’s fiduciary obligations are limited to situations when the controller causes
the corporation to act, which would foreclose Caremark claims against a controller.
Again, no decision of this court has directly addressed this issue. The parties
cite no case in which this court sustained a claim against a controller for breach of
fiduciary duties based on the controller’s inaction. And independent research
revealed none.
It is hard to conceive of any scenario where a controller could be liable for
inaction necessary to support oversight liability under Caremark. The thought
experiment prompts many questions. What would a controller’s obligation to impose
information systems look like? Does a controller have an independent obligation to
establish an information system where the board has failed to do so? Is a controller
obligated to ensure the efficacy of information systems established by the board?
Should a controller override information systems established by the board? And what
about red flags? Information systems are designed to surface red flags to the board.
Should a controller require mandatory reporting to the controller? If a controller
learns of a red flag regardless of the source, is a controller independently obligated to
ensure that the board responds?
An affirmative response to any of these questions would seem to place a
controller in a situation of having to second-guess the board at every turn for fear of
liability. That obligation would invite greater board-level incursions by controllers
and risk undermining Delaware’s board-centric model.
75 Even if board-level control could lead to controller oversight obligations—and
for reasons stated above, that would be a big move—then, at a minimum, the
usurpation or delegation of board-level and managerial power would have to be so
extensive as to justify imposing on the controller all obligations attendant to
overseeing the corporation. The Complaint does not support that inference. The
Control Group held enough voting power to control any stockholder vote. And the
Control Group members occupied multiple high-level leadership positions on the
Board and in management. But none of that authority was so extensive as to justify
rendering the Control Group responsible for overseeing the Company or liable for
their failure to do so.
Count I fails to state a claim.
B. Rule 23.1
As discussed above, “[a] cardinal precept of [Delaware law] is that directors,
rather than shareholders, manage the business and affairs of the corporation.”255 “In
a derivative suit, a stockholder seeks to displace the board’s authority over a litigation
asset and assert the corporation’s claim.”256 Because derivative litigation impinges
on the managerial freedom of directors in this way, “a stockholder only can pursue a
cause of action belonging to the corporation if (i) the stockholder demanded that the
255 Aronson, 473 A.2d at 811 (citing 8 Del. C. § 141(a)), overruled on other grounds by
Brehm, 746 A.2d 244. 256 United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State
Pension Fund v. Zuckerberg, 250 A.3d 862, 876 (Del. Ch. 2020), aff’d, 262 A.3d 1034 (Del. 2021).
76 directors pursue the corporate claim and they wrongfully refused to do so or
(ii) demand is excused because the directors are incapable of making an impartial
decision regarding the litigation.”257 The demand requirement is a substantive
principle under Delaware law.258
Rule 23.1 is the “procedural embodiment” of the demand requirement.259
Under Rule 23.1, a derivative complaint must “state with particularity: . . . any effort
by the derivative plaintiff to obtain the desired action from the entity; and . . . the
reasons for not obtaining the action or not making the effort[.]”260
A stockholder can satisfy the demand requirement by pleading that demand is
futile. In Zuckerberg,261 the Delaware Supreme Court adopted the “universal test”
for demand futility that blends elements of the two precursor tests: Aronson262 and
Rales.263 When conducting a demand futility analysis under Zuckerberg, Delaware
courts ask, on a director-by-director basis:
(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
257 Id.
258 Id.; see Ct. Ch. R. 23.1(a).
259 Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
260 Ct. Ch. R. 23.1(a)(1).
261 262 A.3d 1034 (Del. 2021)
262 473 A.2d 805 (Del. 1984).
263 634 A.2d 927 (Del. 1993).
77 (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.264
“If the answer to any of the questions is ‘yes’ for at least half of the members
of the demand board, then demand is excused as futile.”265 Although the Zuckerberg
test displaced the prior tests from Aronson and Rales, cases properly applying
Aronson and Rales remain good law.266
To plead demand futility under any Zuckerberg theory, a stockholder must
allege “particularized factual statements that are essential to the claim.”267 “It is
generally understood that for a fact to be pled ‘with particularity,’ it must have some
264 Zuckerberg, 262 A.3d at 1059.
265 Id.
266 Id.In 2023, the Court of Chancery amended its rules to reflect the Delaware Supreme Court’s adoption of the Zuckerberg test and modernize the language and presentation of the Rules to bring them closer in style to the Federal Rules of Civil Procedure. See In re: Amendments to Rules 7, 10, 17–25, and 171 of the Court of Chancery Rules, Sections, III, IV, and XVI (Del. Ch. Sept. 25, 2023) (ORDER). 267 Brehm, 746 A.2d at 254.
78 indicia of specificity.”268 A plaintiff must do more than provide notice pleading
permitted under Rule 8.269
The Rule 23.1 particularity requirement is not as strict as the Rule 9
particularity requirement, because Rule 23.1 does not call for “newspaper facts.”270
“[E]ven with Section 220 documents in hand, derivative plaintiffs would be hard
pressed to plead . . . ‘who, what, when, where and how’ facts about fiduciary
wrongdoing” as derivative plaintiffs typically do not have the means to know those
“newspaper” facts like fraud claimants do.271 Still, the particularity requirement of
Rule 9 remains a “useful guidepost.”272 Rule 9 requires, “with respect to the subjects
268 Elburn ex rel. Invs. Bancorp. Inc. v. Albanese, 2020 WL 1929169, at *7 (Del. Ch.
Apr. 21, 2020) [“Invs. Bancorp. I”], appeal denied sub nom. Albanese v. Elburn ex rel. Invs. Bancorp, Inc., 237 A.3d 820 (Del. 2020) (TABLE).); see also United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862, 876–77 (Del. Ch. 2020) [“Zuckerberg I”] (“Rule 23.1 requires that a plaintiff allege specific facts[.]”); Hughes v. Xiaoming Hu, 2020 WL 1987029, at *10 (Del. Ch. Apr. 27, 2020) (same); GoPro, 2020 WL 2036602, at *8 (“The plaintiff pleading demand futility must inform the defendants of the precise transactions at issue by describing with particularity the specific misconduct in which each defendant is alleged to have participated.” (citation modified)). 269 Invs. Bancorp. I, at *7–9.
270 Elburn ex rel. Invs. Bancorp. Inc. v. Albanese, 2020 WL 4194865, at *4–5 (Del. Ch.
July 21, 2020) [“Invs. Bancorp. II”] (denying application to certify interlocutory appeal), appeal denied sub nom. Albanese v. Elburn ex rel. Invs. Bancorp, Inc., 237 A.3d 820 (Del. 2020) (TABLE). 271 Invs. Bancorp II, 2020 WL 4194865, at *5; Invs. Bancorp I, 2020 WL 1929169, at
*8 (observing that derivative plaintiffs asserting fiduciary breaches “were not in the board room, and, unlike fraud, were not the direct targets of the wrongful behavior.”). 272 See Invs. Bancorp I, 2020 WL 1929169, at *9 (describing this court’s “articulation
of Rule 9(b)’s pleading requirements” in Kahn Brothers & Co., Inc. Profit Sharing Plan and Tr. v. Fischbach Corp., 1989 WL 109406, at *4 (Del. Ch. Sept. 19, 1989) as “a useful guidepost for Rule 23.1”).
79 it treats, some greater degree of specificity in pleading. The rule gives to defendants
a right to insist that the circumstances constituting the alleged fraud be specified.”273
Rule 23.1 imposes a pleading-stage requirement. “While Rule 23.1 requires
that a plaintiff allege specific facts, ‘he need not plead evidence.’”274 And although
the requirement of factual particularity is a heightened pleading requirement, it
“does not entitle a court to discredit or weigh the persuasiveness of well-pled
allegations.”275 “[O]nce a plaintiff pleads particularized allegations, then the plaintiff
is entitled to all ‘reasonable inferences that logically flow from particularized facts
alleged by the plaintiff.”276 As the high court explained in Marchand, “[t]he standard
for conducting this inquiry at the demand futility stage is well balanced, requiring
273 Kahn, 1989 WL 109406, at *4.
274 Hughes, 2020 WL 1987029, at *10 (quoting Aronson, 473 A.2d at 816); Ontario
Provincial Council of Carpenters’ Pension Tr. Fund v. Walton, 2023 WL 3093500, at *29 (Del. Ch. Apr. 26, 2023) (same); Zuckerberg I, 250 A.3d at 877 (same); In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *33 (Del. Ch. Jan. 25, 2016) (same). 275 Zuckerberg, 250 A.3d at 877.
276 Hughes, 2020 WL 1987029, at *10 (quoting Beam ex rel. Martha Stewart Living
Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1048 (Del. 2004)) (citation modified); see also Melbourne Mun. Firefighters’ Pension Tr. Fund ex rel. Qualcomm, Inc. v. Jacobs, 2016 WL 4076369, at *1 n.1 (Del. Ch. Aug. 1, 2016) (“When considering a motion to dismiss under Rule 23.1, this Court affords plaintiffs all reasonable inferences that logically flow from the particularized facts alleged in the complaint.” (quoting Postorivo v. AG Paintball Hldgs., Inc., 2008 WL 553205, at *4 (Del. Ch. Feb. 29, 2008))); Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 56 (Del. Ch. 2015) (“I accept as true Plaintiff’s particularized allegations of fact and draw all reasonable inferences that logically flow from those allegations in Plaintiff’s favor.” (citing White v. Panic, 783 A.2d 543, 549 (Del.2001))).
80 that the plaintiff plead facts with particularity, but also requiring that this Court
draw all reasonable inferences in the plaintiff’s favor.”277
The demand analysis is conducted as to the board in place at the time that the
claims at issue were “validly in litigation.”278 This rule protects representative
plaintiffs by preventing defendants from recomposing a board after a derivative claim
is filed to strengthen Rule 23.1 arguments.279
When Plaintiff filed this action, the Board comprised six members: Defendants
Sanford, Miles, and Cahir; and non-parties Weakley, Pelosi, and Reichheld (the
“Demand Board”). Demand Board members Miles, Cahir, Pelosi, and Reichheld are
outside directors; they are not employed by the Company. Weakley is a real estate
agent within the eXp Realty network. To show demand futility, Plaintiff must allege
particularized facts creating a reason to doubt that three of the six Demand Board
members were incapable of impartially considering a demand.280 Defendants concede
277 Marchand, 212 A.3d at 818.
278 Braddock v. Zimmerman, 906 A.2d 776, 785 (Del. 2006).
279 See Harris v. Carter, 582 A.2d 222, 231 (Del. Ch. 1990) (“When claims have been
properly laid before the court and are in litigation, neither Rule 23.1 nor the policy it implements requires that a court decline to permit further litigation of those claims upon the replacement of the interested board with a disinterested one.”); Park Empls.’ & Ret. Bd. Empls.’ Annuity & Benefit Fund of Chi. v. Smith, 2016 WL 3223395, at *10 (Del. Ch. May 31, 2016) (describing as “problematic” a situation “where a manipulation of board composition is employed to discourage meritorious derivative litigation”), aff’d sub nom. Park Empls.’ & Ret. Bd. Empls.’ Annuity & Benefit Fund of Chi. ex rel. BioScrip, Inc. v. Smith, 175 A.3d 621 (Del. 2017) (TABLE). 280 InfoUSA, 953 A.2d at 989–90 (“Plaintiffs must show that a majority—or in a case
where there are an even number of directors, exactly half—of the board was incapable of considering demand.”).
81 that demand is futile as to Sanford, and Plaintiff does not advance arguments as to
Pelosi or Reichheld.281 Plaintiff must therefore show demand futility with respect to
two of the remaining three Demand Board members: Weakley, Miles, and Cahir.
Plaintiff argues that Weakley’s employment relationship with eXp rendered
her beholden to Sanford, who received a material personal benefit from the alleged
misconduct, and that both Miles and Cahir face a substantial likelihood of liability
under Caremark. Because Plaintiff has pled demand futility as to Weakley and Miles,
this decision does not reach Plaintiff’s arguments as to Cahir to assess demand
futility.282
“Generally, demand futility is assessed on a claim-by-claim, or Count-by-
Count, basis.”283 When the counts are based on the same factual predicate, however,
showing that a director is unfit to impartially consider demand as to one satisfies
demand futility as to all.284 Here, the counts rest on the same facts and legal theories
with the only difference being the named Defendants. This decision thus consolidates
the demand analysis.
281 Defendants argue that demand is only futile if at least four of eXp’s six Board
members cannot impartially consider a demand, see eXp Opening Br. at 18, but where the demand board is even numbered, Delaware law requires that only “half of the members of the demand board” be incapable of impartially assessing a demand for demand to be futile. In re Fox Corp. Derivative Litig., at *8 (Del. Ch. Dec. 27, 2024). 282Plaintiff also argues that Miles lacked independence from Sanford, but this decision need not and does not reach that argument. 283 City of Coral Springs Police Officers’ Pension Plan v. Dorsey, 2023 WL 3316246, at
*7 (Del. Ch. May 9, 2023), aff’d, 308 A.3d 1189 (Del. 2023). 284 Id. & n.40 (collecting cases).
82 Plaintiff has alleged particularized facts from which it is reasonable to infer
that Weakley lacked independence from Sanford.
Weakley derived two-thirds of her income from her role at eXp,285 and half of
that from her independent contractor status. As CEO of eXp, Sanford has the power
to terminate Weakley’s status as an independent contractor.286 When a person
derives her principal income from her employment, “that fact ‘powerfully strengthens
the inference’ that the [fiduciary] could not consider a demand on the merits, because
‘it is doubtful that they can consider the demand . . . without also pondering whether
an affirmative vote would endanger their continued employment.’”287 That is
reasonable to infer here.
The fact that the Company identified Weakley as non-independent under both
NASDAQ and SEC rules in public filings is not dispositive of the independence
analysis under Delaware law, but it does bolster this conclusion. 288 That is because
classifying a director as non-independent under NASDAQ and SEC rules is a
285 Compl. ¶¶ 160–64.
286 Id. ¶¶ 161–62. Even if Weakley satisfies all terms for revenue share vesting, it
historically accounted for approximately one third of her eXp Realty-based income. Compl. ¶ 162. See Sciabacucchi v. Liberty Broadband Corp., 2022 WL 1301859, at *29 (Del. Ch. May 2, 2022) (excusing demand where, among other factors, director “reli[ed] on . . . compensation as a source of primary income”). 287 See, e.g., Ezcorp, 2016 WL 301245, at *35 (quoting Mizel v. Connelly, 1999 WL
550369, at *3 (Del. Ch. July 22, 1999)). 288 Compl. ¶ 160.
83 “fundamental determination that a board must make,” that “is also relevant under
[Delaware] law” in the context of demand futility.289
In response to the allegations that Weakley’s agent status renders her
beholden to Sanford, Defendants argue that eXp Realty’s independent contractors
cover their own expenses and insurance.290 Defendants also contend that Weakley is
free to associate with a different firm, bring her current commissions with her, and
possibly enjoy the same level of commission income at her new firm. 291 But these
arguments seek defendant-friendly inferences based in part on hypothetical facts.
They do not rebut the allegation that Sanford controls Weakley’s primary source of
income.
Plaintiff has also alleged particularized facts from which it is reasonable to
infer that Sanford received a material personal benefit from the alleged misconduct.
Bjorkman, Golden, and Gove are all in Sanford’s downline.292 The revenue share
program allowed Sanford to extract “unlimited” bonuses from the continued
performance of each of these persons.293 And Defendants effectively concede this
point by failing to advance demand arguments concerning Sanford.
289 Sandys v. Pincus, 152 A.3d 124, 132–34 (Del. 2016); see also Ezcorp, 2016 WL
301245, at *36 (noting NASDAQ independence standards and Delaware law “are mutually reinforcing and seek to advance similar goals”). 290 eXp Opening Br. at 47.
291 Id.
292 Compl. ¶ 149.
293 Id. ¶¶ 4, 148.
84 Plaintiff has thus alleged particularized facts from which the court can infer
that Weakley lacked independence from a person who received a material benefit
from the challenged action. That is sufficient to create a reasonable doubt of
Weakley’s ability to impartially consider a demand.
Turning to Miles, Plaintiff argues that Miles cannot impartially consider a
demand because he faces a substantial likelihood of liability on claims that would be
the subject of the litigation demand. As discussed above, Plaintiff has adequately
alleged under Rule 12(b)(6) that Miles actively breached his oversight obligations.
That forces the question: What is the relationship between stating a claim under Rule
12(b)(6) and demonstrating that demand is futile based on a substantial likelihood of
liability under Rule 23.1?
The “substantial likelihood of liability” standard derives from Aronson.294
Before Aronson, Delaware law suggested that a plaintiff could show that demand was
futile simply by naming a director as a defendant or by alleging that the director was
involved in the challenged decision.295 Aronson dispelled that notion by introducing
the “substantial likelihood of liability” standard.
294 Aronson, 473 A.2d at 815 (“[T]he mere threat of personal liability for approving a
questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.”). 295 See, e.g., Kaufman v. Beal, 1983 WL 20295, at *4 (Del. Ch. Feb. 25, 1983) (holding
that failure to make pre-suit demand is excused where the derivative plaintiff pleads facts “which, if true, would show that the business judgment rule would not protect the transaction from judicial scrutiny”); Miller v. Loft , Inc., 153 A. 861, 862 (Del. Ch. 1931) (“The rule is well settled in this State that if by reason of hostile interest or guilty participation in the wrongs complained of, the directors cannot be expected to
85 The Delaware Supreme Court in Rales further clarified that, although Aronson
uses the phrase “substantial likelihood,” it is still a pleading standard. The court
held that, “[t]o plead that a director faces a substantial risk of liability, a plaintiff
does not have to demonstrate a reasonable probability of success on the claim”
sufficient to support a preliminary injunction.296 The high court rejected that
requirement as “unduly onerous,” stating that the plaintiff need only “make a
threshold showing, through the allegation of particularized facts, that [its] claims
have some merit.”297 Aronson and Rales remain good law.298
Many decisions of this court have interpreted the “have some merit” language
of Rales to require application of the Rule 12(b)(6) standard, albeit based on
particularized facts.299 Furthermore, as held in Marchand and elsewhere, derivative
institute suit[.]”); Baker v. Bankers’ Mortg. Co., 129 A. 775, 776 (Del. Ch. 1925) (holding that demand is not required “for obvious reasons” where the corporate managers were “guilty [of] participation in the wrongs complained of”); Fleer v. Frank H. Fleer Corp., 125 A. 411, 414 (Del. Ch. 1924) (“Where the demand if made would be directed to the particular individuals who themselves are the alleged wrongdoers and who therefore would be invited to sue themselves, the rule is settled that a demand and refusal is not requisite.”). More recent cases preceding Aronson acknowledged the problem with allowing derivative plaintiffs to evade the demand requirement by merely adding the corporate directors to its complaint and therefore held that merely adding directors and making conclusory allegations of alleged wrongdoing were insufficient to excuse demand. See, e.g., Kaufman, 1983 WL 20295, at *4. 296 Hughes, 2020 WL 1987029, at *12.
297 Rales, 634 A.2d at 934 (citing Aronson, 473 A.2d at 811–12).
298 Zuckerberg, 262 A.3d at 1059 (“Finally, because the three-part test is consistent
with and enhances Aronson, Rales, and their progeny, . . . cases properly construing Aronson, Rales, and their progeny remain good law.”). 299 I have done so many times based on my reading of Rales. See, e.g., Brewer v. Turner, 2025 WL 2769895, at *9 (Del. Ch. Sept. 29, 2025) (denying motion to dismiss); Brewer v. Turner, 2025 WL 3048942, at *5 (Del. Ch. Oct. 30, 2025) (denying motion
86 to certify interlocutory appeal); In re Plug Power Inc. S’holder Litig., 2025 WL 1277166, at *9 (Del. Ch. May 2, 2025); Hanna v. Paradise, 2025 WL 1836642, at *8 (Del. Ch. July 3, 2025); Grabski ex rel. Coinbase Glob., Inc. v. Andreessen, 2024 WL 390890, at *7 (Del. Ch. Feb. 1, 2024); City of Detroit Police & Fire Ret. Sys. ex rel. NiSource, Inc. v. Hamrock, 2022 WL 2387653, at *11 (Del. Ch. June 30, 2022). Others have taken a similar approach. See, e.g., Lipman v. GPB Cap. Hldgs. LLC, 2020 WL 6778781, at *1 (Del. Ch. Nov. 18, 2020) (“I find that the allegations of the Complaint . . . make the threat of liability to the general partner, and its controller, such that it is reasonably conceivable that the general partner could not bring its business judgment to bear on any demand involving these allegations.” (emphasis added)); Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *25 (Del. Ch. Aug. 24, 2020) (finding that the “Plaintiffs have demonstrated that a majority of [the board] faces a substantial likelihood of liability by pleading particularized facts from which it is reasonably conceivable that a majority of the Board knew of evidence of corporate misconduct—the proverbial red flag—yet acted in bad faith by consciously disregarding its duty to address that misconduct” (emphasis added) (internal quotation marks omitted)); Fitbit, 2018 WL 6587159, at *12–13 (“In this case, the demand futility question as to Count II turns on whether a majority of the Demand Board faces a substantial likelihood of liability on the Brophy claim . . . . I find that the causal connection is pled with particularity and is reasonably conceivable. Plaintiffs have adequately pled that the information at issue was material and nonpublic.” (emphasis added)); Pettry ex rel. FedEx Corp. v. Smith, 2021 WL 2644475, at *12–13 (Del. Ch. June 28, 2021), aff’d, 273 A.3d 750 (Del. 2022) (“It is not reasonably conceivable that the Board acted in bad faith in consciously disregarding its duty to oversee the affairs of the Company. . . . Plaintiff has failed to plead particularized facts that make it reasonably conceivable a majority of the [defendants] face a substantial likelihood of liability for ignoring red flags in a manner demonstrating a conscious failure to monitor or oversee corporate operations.” (emphasis added)); Corbat, 2017 WL 6452240, at *2 (“To my mind, the allegations of the Complaint, if true, fail to demonstrate scienter. The Complaint does not make it reasonably conceivable that the directors acted in bad faith.” (emphasis added)); Silverberg ex rel. Dendreon Corp. v. Gold, 2013 WL 6859282, at *13 (Del. Ch. Dec. 31, 2013) (“I conclude that [the plaintiff] has pled particularized facts sufficient to show that it is reasonably conceivable that he will be able to satisfy the first factor of a Brophy claim.” (emphasis added)); Cent. Laborers’ Pension Fund v. Karp, 2025 WL 1213104, at *19 & n.204 (Del. Ch. Apr. 25, 2025) (stating that the court “must view well-pleaded facts holistically in assessing demand futility” and that “the test is whether the complaint alleges a constellation of particularized facts which, when viewed holistically, support a reasonably conceivable inference that an improper purpose sufficiently infected a director’s decision to such a degree that the director could be found to have acted in bad faith” (emphasis added) (internal quotation marks omitted) (quoting IBEW Local
87 plaintiffs are entitled to all “reasonable inferences” that logically flow from
particularized allegations.300 No meaningful distinction exists between what is
reasonably conceivable based on particularized allegations, on the one hand, and
what is reasonably inferable from particularized allegations, on the other. Indeed,
decisions of this court have used “reasonably conceivable” and “reasonable inference”
interchangeably when analyzing demand futility.301
Putting it all together, a plaintiff can demonstrate a substantial likelihood of
liability for demand futility purposes by pleading a claim that meets the Rule 12(b)(6)
standard based on particularized factual allegations.302
Union 481 Defined Contribution Plan & Tr. ex rel. GoDaddy, Inc. v. Winborne, 301 A.3d 596, 623 (Del. Ch. 2023))). 300 Marchand, 212 A.3d at 818; Invs. Bancorp I, 2020 WL 1929169, at *6.
301 See, e.g., IBEW, 301 A.3d at 619, 623 (“Delaware decisions have read [Rule 9(b)
and Rule 23.1] together to require that a plaintiff plead particularized facts that can support a reasonable inference about the directors’ state of mind. . . . At the pleading stage, the test is whether the complaint alleges a constellation of particularized facts which, when viewed holistically, support a reasonably conceivable inference that an improper purpose sufficiently infected a director's decision to such a degree that the director could be found to have acted in bad faith.” (emphasis added)); Chou, 2020 WL 5028065, at *1, *25 (“In order to survive a motion to dismiss under Rule 23.1, a plaintiff must raise an inference that demand on the board to undertake the action would have been futile. Typically, in the Caremark context, this requires a pleading of specific facts from which the Court may infer a substantial likelihood of liability on the part of a majority of the board on whom demand would have been made. . . . The Plaintiffs have demonstrated that a majority of ABC’s Board faces a substantial likelihood of liability by pleading particularized facts from which it is reasonably conceivable that a majority of the Board “knew of evidence of corporate misconduct— the proverbial ‘red flag’—yet acted in bad faith by consciously disregarding its duty to address that misconduct.”(emphasis added)). 302 Defendants dispute this articulation of Delaware law. They contend that a “substantial likelihood of liability may require more than a reasonably conceivable claim,” even on based on particularized facts. Defs.’ Supp. Br. at 10. Defendants cite Credit Glory for this statement, but the passage of Credit Glory on which they rely
88 Plaintiff has stated a claim against Miles based on particularized factual
allegations. Plaintiff alleges that Miles received the same red flags that the full
Board received. As discussed above, particularized pleading requires a degree of
specificity but does not require the “‘who, what, when, where and how’ facts about
fiduciary wrongdoing” required under Rule 9.303 Plaintiff’s red-flag allegations exceed
this standard. The Complaint pleads facts about the viral post in September 2020,
the eleven-page memorandum sent to a Board member in October 2020, the email
report sent to the full Board in 2022.
As to Miles alone, the Complaint alleges that he knew about and openly
discussed the culture of drug use and sexual assault at eXp events, including the
11:00 p.m. “rule” and Conord’s participation.304 The Complaint alleges that Miles
told the Whistleblower about Conord’s other sexual misconduct and called that
information “hush hush” in December 2021.305 These are highly specific allegations,
which identify when and to whom Miles made statements, and which exceed the
particularity of allegations found in other oversight cases that have survived a motion
does not address the issue. Defs.’ Supp. Br. at 6–7 (citing Credit Glory, 2025 WL 3439671, at *3 n.34). It merely restates the standard that this decision endeavors to explain. 303 Invs. Bancorp II, 2020 WL 4194865, at *5; Invs. Bancorp I, 2020 WL 1929169,
at *8. 304 Compl. ¶ 103.
305 Id. ¶ 104.
89 Having alleged particularized facts sufficient to create a reasonable doubt of
the ability of Weakley and Miles to impartially consider a demand, and given
Defendants’ concessions regarding Sanford, Plaintiff has shown that demand would
be futile. The motion to dismiss the Complaint under Rule 23.1 is denied.
III. CONCLUSION
The motions to dismiss Count I under Rule 12(b)(6) is granted. The motions to
dismiss all other counts are denied.
Related
Cite This Page — Counsel Stack
Los Angeles City Employees' Retirement System v. Glenn Sanford, Counsel Stack Legal Research, https://law.counselstack.com/opinion/los-angeles-city-employees-retirement-system-v-glenn-sanford-delch-2026.