Clarity At Last? Court Of Chancery Confirms Corporate Officers Owe Oversight Duties

• Jurisdiction: Delaware,United States
• Law Firm: Duane Morris LLP
• Subject Matter: Corporate/Commercial Law, Employment and HR, Compliance, Corporate and Company Law, Directors and Officers, Discrimination, Disability & Sexual Harassment
• Author: Rebecca A. Guzman, Richard Renck, Christopher Winter, Phillip M. Hudson III, P.A. and Sahba Saravi
• Published date: 15 February 2023

Since Chancellor William T. Allen's seminal ruling in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), the question of the duties owed by corporate officers, not directors, has remained unclear. For years, practitioners, academics and the courts have grappled with this question and others. Are officers agents, fiduciaries or both? What duties do officers owe? What is the source of those duties? Are they the same as those of directors? What standard is applied to officers? The list goes on.

Recently, in In re McDonald's Corporation Stockholder Derivative Litigation, Vice Chancellor J. Travis Laster answered some of these questions and provided long-needed clarity, holding that corporate officers "owe a fiduciary duty of oversight as to matters within their areas of responsibility." 2023 WL 407668, *9 (Del. Ch. Jan. 26, 2023).

Background

In this case, the shareholders of McDonald's derivatively sued the company's former Executive Vice President and Global Chief People Officer David Fairhurst for, among other things, a breach of the duty of oversight. The plaintiffs claimed that Fairhurst consciously ignored (and participated in) red flags relating to sexual harassment and misconduct taking place companywide. The plaintiffs alleged that Fairhurst created a "party atmosphere" and the human resources department (which Fairhurst oversaw) failed to adequately address complaints of sexual harassment and misconduct. Fairhurst moved to dismiss the claim, arguing that Delaware law does not recognize oversight claims against officers. Vice Chancellor Laster, however, disagreed. Instead, he confirmed that corporate officers owe a duty of oversight.

The Delaware Court of Chancery articulated four main reasons why officers do owe a duty of oversight:

The Source of Oversight Duties

Starting with the history of the Caremark decision, in its predecessor case, Graham v. Allis-Chalmers Manufacturing Co., 188 A.2d 125 (Del. 1963), and successor case, Stone v. Ritter, 911 A.2d 362 (Del. 2006), the court found that the reasoning behind these cases lent support for the extension of oversight duties to corporate officers. The court focused on three principles articulated in Caremark as a basis forrecognizing a corporate board's duty of oversight, and found those principles equally apply to officers.

The first Caremark premise is the "seriousness with which the corporation law views the role of the corporate board." Caremark, 698 A.2d at 970. The court explained that Delaware corporate law applies the same view to the role of officers, as officers are generally the ones "running the business of the corporation." McDonald's, 2023 WL 407668, at...