The Delaware Court of Chancery ruled in LACERS v. Sanford that failures to investigate and remediate credible allegations of workplace sexual misconduct can support shareholder breach of fiduciary duty claims against directors and officers. Chancellor McCormick held that oversight responsibilities extend to ensuring a safe workplace, particularly when red flags signal central legal risks.
The court held that widespread and severe sexual misconduct within eXp World Holdings, Inc., a cloud-based real estate services company, can amount to "corporate trauma" sufficient to support claims for breach of fiduciary duty when leadership conceals, ignores, or fails to address it.
The case centers on allegations that, for years, two top eXp agents systematically drugged and sexually assaulted female agents at company-sponsored events, with other agents participating or looking the other way. Beginning in 2020, repeated and credible warnings, including a viral Facebook post, an 11‑page memorandum detailing multiple assaults, direct reports to executives, arrests of one of the perpetrators, and a whistleblower director's persistent alerts, put eXp leadership on notice of pervasive sexual misconduct by their financially valuable "downline" agents. Despite this, the board and senior executives allegedly protected the perpetrators, concealed misconduct, denied victim requests for remedial action, ran insider‑controlled investigations, ignored outside counsel's recommendations, and retaliated against the whistleblower. The complaint asserts that these failures allowed a violent culture to persist until public lawsuits and media reporting in 2023 forced action.
The court allowed claims that the CEO and board chair actively breached his duty of loyalty, finding it reasonably conceivable that he knew of the assaults, covered them up, retained and financially protected perpetrators because they were in his revenue downline, and retaliated against the whistleblower director. The court also found that the board's inadequate action in the face of multiple "red flags" was sufficient to plead a Caremark oversight claim grounded in bad‑faith failure to act. The court further held that the plaintiff adequately pled demand futility because at least half of the demand board members faced a substantial likelihood of liability or lacked independence. However, the court rejected a novel claim that a control group of individuals could owe independent oversight duties merely because of their stockholder control.
Notably, the court declined to follow the reasoning of Credit Glory v. Lundgren, -- A.3d --, 2025 WL 3439671 (Del. Ch. Dec. 1, 2025), which reasoned that interpersonal misconduct like sexual harassment governed by employment law cannot support a claim for breach of fiduciary duty. The court distinguished Credit Glory on the ground that the claim at hand was not that sexual harassment itself constituted a breach of the duty of loyalty, but rather that the cover-up and retaliation of sexual misconduct amounted to active misconduct.
This is a pivotal moment for corporate governance. Beyond legal exposure, companies that ignore or minimize misconduct expose their employees, culture, and long‑term value to serious risk.
Affirmative steps boards and leadership teams can take now:
- Build robust reporting systems that ensure employees can raise concerns safely and anonymously, and ensure those systems are monitored at the board level.
- Respond decisively to red flags: Investigations must be prompt, credible, and independent. "Nominal" or delayed efforts are not enough under Caremark.
- Strengthen HR oversight at the top, including regular reporting to the board on culture, complaints, investigation outcomes, and systemic risks.
- Invest in prevention through consistent training, clear conduct expectations, and visible leadership accountability.
- Create a culture where misconduct cannot hide, and where leadership models respect, safety, and transparency.
The takeaway is clear: Taking steps to ensure a safe workplace is not just an HR priority—it's a fiduciary obligation. Companies that treat it that way are better protected legally and better positioned to thrive.
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