Non-director officers may face liability for failing to properly oversee the corporation’s affairs and ignoring “red flags” within their “areas of responsibility.”

Key Points:

..The McDonald’s Corporation’s response to allegations of sexual harassment at the company led to an SEC enforcement action and decision from the Delaware Court of Chancery expanding liability for officers under Delaware law and arguably under the federal securities laws.

..In In re McDonald’s Corporation Stockholder Derivative Litigation, the Delaware Court of Chancery clarified that stockholders may hold non-director corporate officers liable for failures in oversight. Prior to this decision, the Delaware courts had expressly recognized oversight duties only for corporate directors.

..An officer’s oversight duties include the obligation to report upward credible information that the company may be violating the law. Officers must also make “good faith” efforts to establish information systems to effectuate this reporting.

..A separate SEC enforcement action dealt with the response from the McDonald’s board to the allegations of misconduct.

..Read together, McDonald’s and the separate SEC enforcement action illustrate how the identification and resolution of corporate crises can create difficult disclosure issues for public companies and potential liability for corporate officers, underscoring the care that officers and directors should exercise in responding to allegations of corporate misconduct.