Graham v. Allis-Chalmers Manufacturing Co.

Delaware Court of Chancery · 1962 · Corporations

40 Del. Ch. 335 (1962)

Updated August 1, 2026

Corporationsoversight duties (pre-Caremark)director liabilityoversightantitrust violationsduty of caredelegationgood faith reliance

Facts

Plaintiffs alleged that Allis-Chalmers directors and officers violated their fiduciary duties by permitting, condoning, acquiescing in, or failing to prevent employees from engaging in illegal price-fixing and bid-rigging that led to criminal fines, potential civil antitrust suits, and injury to corporate goodwill. Allis-Chalmers was a very large and diversified manufacturing company with a fourteen-member board that met monthly, reviewed business summaries, and participated in policy decisions, while operational pricing decisions were delegated through layers of management within the Power Equipment Division. The directors who testified denied any knowledge of the illegal conduct before rumors emerged from the Philadelphia investigation in late 1959, after which the company ordered cooperation with the grand jury and adopted a policy statement directing strict compliance with antitrust laws. Plaintiffs also relied on 1937 Federal Trade Commission cease-and-desist decrees, but those decrees were consented to solely to dispose of the proceeding, involved different conduct, and predated the service of the directors sued here.

Issue

Can directors of a large corporation be held derivatively liable for losses caused by employees' antitrust violations when there is no proof the directors actually knew of the misconduct and no surrounding facts showing they had reason to suspect and prevent it? More specifically, did the prior 1937 FTC decrees or the structure of the business place these directors on notice so as to make their lack of discovery negligent?

Rule

Director negligence in the selection and supervision of employees must be judged case by case, with regard to the nature and size of the business, the extent, method, and reasonableness of delegation of executive authority, and the zeal and honesty of purpose shown by directors in performing their duties. Directors may rely in good faith on corporate records and reports, are not generally required to anticipate employee wrongdoing or install an espionage system, and are personally liable only where the facts and circumstances place the onus for the resulting harm on inattentive or supine directors or where they foolishly or recklessly repose confidence in untrustworthy agents and turn away from readily detectable corruption.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Industrial Systems, a diversified manufacturer based in Denver, has a 12-member board that meets monthly, reviews operating summaries, and delegates day-to-day sales decisions to division managers. Unknown to the board, several regional sales employees in Texas secretly coordinate bids with competitors for eight months, leading to criminal fines against the corporation.

In a stockholder derivative suit against the directors for failing to prevent the bid-rigging, which is the strongest argument for the directors?

Explanation. The majority rule is that oversight negligence is judged case by case, considering the nature and size of the business, the reasonableness of delegation, and the directors' attentiveness. Directors of a large corporation are not generally required to anticipate employee misconduct or install an espionage system absent facts giving reason to suspect wrongdoing. Here the board was active, reviewed reports, and reasonably delegated operations, so the best answer is that the directors are likely not liable.