The Delaware Court of Chancery held, in its January 25, 2023 opinion In re McDonald’s Corp. Stockholder Derivative Litigation, C.A. No. 2021-0324-JTL, that corporate officers owe a duty of oversight akin to that owed by directors under the court’s decision in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). The court explained that this finding was a natural extension of precedent and found further support in multiple other sources.
In McDonald’s, multiple shareholders of McDonald’s Corporation brought a derivative suit against David Fairhurst, who served as the company’s Executive Vice President and Global Chief People Officer from 2015 until his termination for cause in 2019—his job was to provide a “safe and respectful workplace.” The plaintiffs alleged that Fairhurst breached his duty of oversight by consciously ignoring red flags regarding the occurrence of sexual harassment at the company. The plaintiffs also alleged that he breached his duty of loyalty by engaging in sexual harassment himself. Fairhurst moved for dismissal of the claims against him, arguing that as an officer, he does not owe a duty of oversight and that plaintiffs otherwise failed to state a claim.
The court found that Fairhurst, like all officers and directors, owed fiduciary duties, including the duty of oversight. The court found support for the extension of oversight duties in several sources. To start, the court pointed out the Caremark court’s reasoning for finding the duty in the first place—“the seriousness with which the corporation law views the role of the corporate board”—which the McDonald’s court found logically extended to officers. The court explained that, in fact, “the Caremark oversight role is more suited to corporate officers who are responsible for managing the day-to-day affairs of the corporate enterprise”; that the board must be able to rely on officers to provide relevant and timely information to fulfill its oversight duty; and that to receive credit under the federal Organizational Sentencing Guidelines, a corporation needs to have in place compliance systems that apply to all “high-level personnel,” including executive officers.
As a second source for officer duties of oversight, the court pointed to the Delaware Supreme Court’s finding in Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009), that officers owe the same fiduciary duties as directors. Third, the court pointed to the fact that officers, as agents who report to the board, owe oversight duties under agency law and that these duties require the agent to use “reasonable effort to provide information, act reasonably and consistently with any direction furnished by the principal.” Finally, the court pointed out that because of the role officers play in gathering and providing information to the board, it is important that there be a way for the board to hold officers accountable when they fail to fulfill that role. The court did make sure to note that based on an officer’s responsibilities, the scope of the duty of oversight could differ from that of a director.
The court in McDonald’s also found that the plaintiffs had pleaded sufficient allegations to support a claim that Fairhurst had breached his duty of oversight by ignoring red flags of sexual harassment. The court noted that the complaint alleged, among other things, Fairhurst’s promotion of a party atmosphere in the company; the human resources department’s (with Fairhurst’s knowledge) failure to address complaints about conduct of coworkers and executives; employees’ fear of retaliation for reporting complaints to the human resources department; the existence of numerous US Equal Employment Opportunity Commission complaints that had been filed by employees; ensuing publicity around the sexual harassment issues at McDonald’s, including widespread walkouts by employees across the United States; a Senate inquiry regarding the allegations; and the fact that Fairhurst himself had engaged in sexual harassment for which he was disciplined and ultimately fired. These allegations taken together, the court explained, were sufficient to infer that red flags existed and that Fairhurst was aware of those red flags but consciously ignored them.
The court further found sufficient allegations in support of the claim that Fairhurst breached his duty of loyalty by engaging in sexual harassment, explaining that “[s]exual harassment is bad faith conduct. Bad faith conduct is disloyal conduct. Disloyal conduct is actionable.” Based on the allegations mentioned above, the court found it could reasonably infer that Fairhurst breached his duty of loyalty. Accordingly, the court denied the motion to dismiss as to both claims.
McDonald’s provides a long-overdue clarification of officer duties in the realm of oversight. The opinion provides certainty that officers owe the same duties as directors including with regard to the duty of oversight with some possible variation regarding the scope of oversight duties depending on the officer’s responsibilities.