Delaware Chancery Court Ruling Expands Fiduciary Duties for Delaware Officers

Vice Chancellor Travis Laster of Delaware’s Court of Chancery’s denial of a motion to dismiss in In re McDonald’s Corporation Stockholder Derivative Litigation late last month has clarified and expanded the fiduciary duties imposed on corporate officers in Delaware.

Former McDonald’s Executive Vice President and Global Chief People Officer David Fairhurst’s motion to dismiss claims that he had breached his fiduciary duties by “allowing a corporate culture to develop [at McDonald’s] that condoned sexual harassment and misconduct” was premised on the concept that unlike directors, corporate officers owe no fiduciary duty of oversight under Delaware law. His motion to dismiss was denied by the Delaware Court of Chancery on January 25, 2023, with the court instead acknowledging for the first time that corporate officers owe a duty of oversight like that imposed upon directors, citing the reasoning behind the 1996 decision in Caremark[1].

Caremark established that directors’ fiduciary duties include the duty of oversight that not only requires directors to ensure that effective information and reporting systems exist within a company, but also imposes a duty not to disregard “red flags” indicating misconduct. Prior to the recent ruling in In re McDonald’s Corp., the Court of Chancery had never explicitly found that corporate officers have the same fiduciary duties as directors, despite Delaware Supreme Court opinions to that effect.

In applying the duty of oversight to officers, the Court of Chancery in In re McDonald’s Corp. reasoned that day-to-day operations of a company often fall on the shoulders of nondirector officers, including the management of its information and reporting systems mentioned in Caremark. Likewise, the court noted officers also play an essential role in ensuring that directors receive timely notice of relevant information regarding the company. The court noted that not applying this duty of oversight to officers would “create a gap in the ability of directors to hold officers accountable.”

Moving beyond the duty of oversight, the Court of Chancery in In re McDonald’s Corp. also found that an officer’s personal acts of sexual harassment breach their duty of loyalty. When considering the duty of loyalty, the court stated that corporate officers “are not permitted to use their position of trust and confidence to further their private interests.” The court stated that an executive officer using their position to harass, intimidate or assault employees is acting for their own private interests, and so violates the duty of loyalty. In this instance, harassment explicitly goes against company policy and the law, resulting in McDonald’s being subjected to avoidable liability because of Fairhurst’s sexual harassment of employees.

While the Court of Chancery ruling in In re McDonald’s Corp. has expanded the fiduciary duties of corporate officers in Delaware, questions still remain, including whether business judgment-style protections apply to corporate officers, particularly when that officer is considering information outside their area of specialty.

For additional information, questions or assistance regarding In re McDonald’s Corporation Stockholder Derivative Litigation and its application to corporate officers, contact Matthew M. McDonald at mmmcdonald@klehr.com.

Author Matthew M. McDonald is a partner in the Corporate and Securities Department at Klehr Harrison.

[1] In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996)