Earlier this year, we wrote about Delaware’s recent statutory changes extending certain protections to corporate officers that were previously only afforded to directors. As we mentioned in that advisory, an exception to the protections afforded to officers includes claims made by the corporation or derivative claims made by a stockholder on behalf of the corporation for the officer’s breach of their fiduciary duty of care.
Shortly after the article, on January 25, 2023, Delaware’s Court of Chancery released an opinion (In Re McDonald’s Corp. Stockholder Derivative Litig., No. 2021-0324-JTL, 2023 Del. Ch. LEXIS 23, 2023 WL 387292) that exemplifies how officers can be held liable for a breach of fiduciary duty claim brought against them by the stockholders.
This stockholder derivative claims at issue were brought against McDonald’s executive vice president and global chief people officer. During the executive’s tenure, he had day-to-day responsibilities to ensure the company provided its employees with a safe and respectful workplace. The stockholders alleged the executive breached his fiduciary duty by allowing the company to develop a culture in which sexual harassment and misconduct were overlooked. They further alleged that the officer had a duty to provide oversight and to make a good faith effort to establish information systems or controls to generate necessary information to manage the company’s human resource function. The stockholders claimed that the executive breached his duty of oversight by consciously ignoring red flags.
The executive moved to dismiss the stockholders’ claims and disclaimed responsibility for the oversight obligation, citing In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). In Caremark, the court ruled that the obligations of a director include a duty to attempt in good faith to ensure that a corporate information and reporting system, which the board concludes is adequate, is operating to inform the board of potential noncompliance with applicable legal standards. The executive argued that Delaware law does not impose any obligations on officers comparable to the duty of oversight articulated in the Caremark decision.
The Delaware Court of Chancery disagreed. The court affirmatively stated, “This decision clarifies that corporate officers owe a duty of oversight.” In fact, the court explained that the duty of oversight may even apply to officers to a greater degree. It is clear from the opinion that under Delaware law, corporate officers owe the same fiduciary duties as corporate directors and such duties “logically” include a duty of oversight. Boards, board risk committees, and officers should seek further advice on best practices. Sherman & Howard has a Corporate Governance team ready to counsel.
