## Facts

- Shareholders brought a derivative action seeking to recover corporate damages allegedly caused by federal antitrust violations.
- The corporation and four non-director employees were indicted on multiple federal antitrust counts and entered guilty pleas.
- Plaintiffs sued the corporation’s directors and the four employees, alleging directors were responsible for failing to prevent the unlawful conduct.
- Plaintiffs initially claimed the directors had actual knowledge of, or notice-triggering facts about, the antitrust activity.
- The evidentiary record (hearing and depositions) produced no proof that any director had actual knowledge of the misconduct or facts that should have put the directors on notice.
- Plaintiffs then argued the directors were liable as a matter of law for failing to take affirmative steps to learn of and prevent antitrust violations by employees, even without any “cause for suspicion.”
- Plaintiffs also argued prior antitrust-related consent decrees from decades earlier put the board on continuing notice requiring heightened monitoring.
- The Court of Chancery found no director liability and denied certain discovery requests, including document production and depositions of the four non-director defendants who had not appeared and had not been served.
- Plaintiffs appealed both the merits ruling and the challenged discovery rulings.

## Issues

1. Whether directors may be held liable in a derivative action for corporate losses from employees’ antitrust violations when there is no evidence the directors knew of, or were on notice of, the misconduct.
2. Whether Delaware law imposes an affirmative duty on directors, absent warning signs, to install and operate a continuous system aimed at detecting and preventing illegal conduct by employees.
3. Whether the Court of Chancery abused its discretion in denying document production and refusing to compel depositions of non-appearing, non-served non-director defendants.

## Decision

- Affirmed the judgment of non-liability for the directors.
- Held that, absent notice or “cause for suspicion,” directors may rely in good faith on officers and employees and are not required to maintain a constant surveillance regime to uncover wrongdoing.
- Concluded that the prior, decades-old consent decrees did not, without more, impose an ongoing duty of special vigilance sufficient to establish director breach here.
- Affirmed the challenged discovery rulings, including refusal to compel depositions of non-appearing, non-served non-director defendants and denial of pretrial document production.

## Legal Principles

- Directors are not personally liable for employee illegality solely because it occurred on their watch; liability requires knowledge, notice, or red flags triggering a duty to inquire and respond.
- Directors may rely on the honesty and integrity of subordinates until circumstances arise that would put a reasonable director on suspicion that something is wrong.
- When suspicion arises, directors cannot ignore indications of misconduct and later claim lack of awareness as a defense to inaction.
- Historical consent decrees, standing alone and believed complied with, do not necessarily create perpetual notice of new misconduct or a continuing duty of heightened monitoring.
- Trial courts have discretion over discovery; courts may refuse to compel depositions of defendants who have not appeared and have not been served with process.

## Conclusion

The Delaware Supreme Court held that directors were not liable for corporate losses arising from employees’ antitrust violations where the record showed no director knowledge or notice and no contemporaneous warning signs requiring further inquiry, and it upheld related discovery rulings denying additional production and depositions.


Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125 (Del. 1963)