The Need for Increased Possibility of Director Liability: Refusal to Dismiss In re Wells Fargo & Co. Shareholder Derivative Litigation, a Step in the Right Direction

Abstract

The frequency and magnitude of corporate scandals call into question the effectiveness of the current mechanism to police director misconduct. Presently, directors are rarely held personally liable for failing to fulfill their fiduciary duties. The combination of multiple judicial and statutory protections and the courts’ hesitance to impose director liability shields directors and makes it difficult for shareholder plaintiffs to succeed on such claims. In fact, most claims are dismissed before courts have an opportunity to hear the merits of the case. This Note focuses on the oversight liability doctrine and argues that it is applied too narrowly, at least at the motion to dismiss stage, to deter director misconduct and encourage adequate oversight by directors. This Note uses the Wells Fargo corporate scandal and the directors’ failure of oversight as a case study. In In re Wells Fargo & Co. Shareholder Derivative Litigation, the United States District Court for the Northern District of California denied the director defendants’ motion to dismiss, allowing shareholder plaintiffs the opportunity to prove their claims against the directors. This Note argues that this rare decision is a positive step that sends a firm message to directors that they cannot disregard their duties and expect complete protection from liability.