Tyco v Walsh: Only Shareholders May Ratify a Breach of Fiduciary Duty by a Director

In Tyco International Ltd. v. Walsh, the United States Court of Appeals for the Second Circuit reversed a district court judgment for Walsh on the claim that he had breached his fiduciary duty of loyalty and failed to disclose his financial interest in an acquisition.  Tyco Int’l Ltd. v. Walsh, No. 10-4526-cv, 2012 WL 75365 (2d Cir. January 11, 2012).  

Tyco incorporated in Bermuda in 1997 and Walsh served as a director on Tyco’s board from 1992 until 2002.  In late 2000, Walsh held a meeting introducing the CEO of Tyco, Dennis Kozlowski, to the CEO of CIT Group Inc. (CIT), Albert Gamper Jr.  After the meeting, Walsh and Kozlowski discussed a finder’s fee which was realized in June 2001 in the form of a $10 million payment to Walsh and another $10 million to a charity picked by Walsh.  

The payments were described as “investment banking services” in connection with the CIT acquisition.  The board was not aware of the payments until Walsh disclosed them in Tyco’s proxy statement.  Walsh then returned the $20 million dollars to Tyco.  Tyco sued to recover interest on the $20 million dollars as well as consequential and punitive damages.  

Walsh argued that the board had “ratified” his actions, curing any breach of fiduciary duties.  Tyco’s bylaws permitted the board to approve remuneration policy for directors, but stated that any conflicts of interest had to be disclosed.  The bench trial found the board had implicitly ratified the payment to Walsh in accordance with the bylaws and dismissed the claim.  Tyco Int’l Ltd. v. Walsh, 751 F. Supp. 2d 606 (S.D.N.Y. October 10, 2010). 

The Second Circuit reversed, concluding that the trial court had apparently “conflated the issue of whether the board could ratify the CEO's decision to pay Walsh without first securing board approval with that of whether the board could ratify Walsh's failure to disclose his interest in the acquisition.”  With respect to ratification of the failure to disclose the receipt of the $20 million, the court noted that under Bermuda law some question existed as to whether boards could ever ratify a breach of fiduciary duty.   Even if it was possible, the court found that ratification had not occurred.  The duty to disclose the payment was owed not simply to the board but also to shareholders of the company.  As a result, the shareholders had to ratify the breach. No such ratification, however, occurred.     

The district court had decided the damages in the event the decision was reversed and the parties did not contest the amount.  They did contest whether the Company was entitled to consequential damages by Tyco related to the retention of a law firm.  The court sent the issue back to the trial court for resolution. 

The primary materials for this case may be found on the DU Corporate Governance website.

Samuel Hagreen