## Facts

- Hampshire Group, Ltd., a public apparel company, faced internal allegations in 2006 of financial and other improprieties involving CEO Ludwig Kuttner and senior finance officers Charles Clayton and Roger Clark.
- The audit committee retained outside counsel and consultants to investigate; the investigation substantiated certain misconduct, including improper personal expense reimbursements and a “sweater-donation” tax arrangement.
- The sweater-donation arrangement involved company-provided sweaters being used to support employees’ improper personal charitable deductions and created corporate tax compliance problems, including executive-compensation reporting issues.
- In 2004 the audit committee instructed Clayton to stop the sweater-donation arrangement, but the practice continued into 2006; Clark participated at least once by taking an improper deduction.
- Hampshire restated financial statements for 2003 through the first quarter of 2006; the restatement process contributed to NASDAQ delisting and management upheaval.
- Hampshire sued Kuttner, Clayton, and Clark for breach of fiduciary duty and sought damages including investigation costs, tax liabilities and penalties, and restatement-related expenses.
- Hampshire settled with Kuttner (payment and a discounted repurchase of his shares) and released him, leaving Clayton and Clark as the primary remaining defendants.
- Clayton and Clark asserted counterclaims against Hampshire (including defamation and contract-based claims); Clayton also asserted third-party contribution claims against certain directors and officers.
- The Court of Chancery tried the case and issued a post-trial memorandum opinion resolving the fiduciary claims, counterclaims, and third-party claims.

## Issues

1. Whether Delaware corporate officers owe fiduciary duties of care and loyalty to the corporation and how those duties apply to senior finance officers.
2. Whether consciously causing or permitting corporate law violations and related misreporting constitutes a non-exculpable breach of the duty of loyalty/bad faith.
3. Whether officers can obtain monetary-liability exculpation under DGCL § 102(b)(7).
4. What categories of damages (investigation costs, tax liabilities/penalties, restatement-related costs) are recoverable and which are too remote or insufficiently linked to the misconduct.
5. Whether the officer defendants proved their counterclaims and whether contribution could be shifted to directors or other officers.

## Decision

- The court held that corporate officers owe fiduciary duties of care and loyalty comparable in nature to directors’ duties, and it applied those duties to the officer defendants’ conduct.
- As to Clayton, the court found a breach of the duty of loyalty based on intentional misconduct, including continuing a tax-related arrangement after being told to stop and facilitating improper personal expense reimbursements for the CEO.
- The court imposed monetary liability on Clayton for damages reasonably traceable to his disloyal conduct, while limiting recovery to amounts proximately caused by that misconduct rather than awarding all costs claimed by Hampshire.
- As to Clark, the court found narrower wrongdoing and did not impose the same scope of liability as to Clayton, assessing Clark’s involvement transaction-by-transaction and requiring proof of conscious disloyalty for loyalty-based liability.
- The court rejected the officer defendants’ counterclaims for failure of proof and rejected Clayton’s third-party contribution claims against directors and other officers.

## Legal Principles

- Delaware corporate officers owe fiduciary duties of care and loyalty to the corporation, and those duties require independent judgment even when acting under a dominant CEO.
- A knowing decision by an officer to cause or permit the corporation to violate law can constitute bad faith and a breach of the duty of loyalty, not a protected business judgment.
- DGCL § 102(b)(7) authorizes exculpation only for directors; corporate officers do not receive statutory exculpation from monetary liability for fiduciary breaches.
- In determining damages for fiduciary breaches, the court awards only those losses and expenses that are proximately caused by the proven misconduct; large investigation and litigation costs are not automatically recoverable in full.
- Liability for officer involvement in financial reporting depends on the level of scienter: honest error sounds in care, while knowing or reckless misconduct supports loyalty/bad-faith liability.

## Conclusion

The court treated senior finance officers as fiduciaries who must protect the corporation’s interests, held that deliberate continuation of unlawful practices and facilitation of improper reimbursements can constitute disloyalty, confirmed that officers cannot invoke DGCL § 102(b)(7) exculpation, and limited damages to costs causally linked to proven wrongdoing while rejecting the officers’ counterclaims and contribution theories.


Hampshire Grp., Ltd. v. Kuttner, C.A. No. 3607-VCS, 2010 Del. Ch. LEXIS 144 (Del. Ch. July 12, 2010)