Shareholder Suit Against Dollar General Directors and Officers Highlights Need for Corporate Oversight
The shareholder derivative action Conforti v. Owen, et al., filed in the U.S. District Court for the Middle District of Tennessee, serves as an important reminder to corporate directors and officers of the duty of oversight, particularly in the wake of the Delaware Court of Chancery’s recent ruling in In re McDonald’s Corp., in which the court acknowledged that corporate officers owe a duty of oversight similar to that imposed on corporate directors.
07.10.23
The amended complaint, filed by shareholder Brent Conforti earlier this year, alleges that Dollar General’s board of directors and certain officers failed to implement and maintain an effective system of internal controls in violation of their fiduciary duties, thereby permitting hazardous working conditions for Dollar General employees to continue while remaining “deaf and blind” to repeat OSHA violations and concerns. Notably, since 2017, OSHA has issued more than $15 million in fines to the company for workplace safety violations related to over 180 inspections nationwide. Additionally, at least six Dollar General employees have died during armed robberies from 2016 to 2020, while others have been seriously injured. The complaint argues that neither the company’s directors nor its officers met their fiduciary duties to address workplace safety and violent crime, investigate when red flags appeared and implement protocols that would have ensured greater visibility into workplace hazards and violent crime. While the company has, among other policies, Corporate Governance Guidelines requiring the board of directors to exercise reasonable oversight over the implementation and effectiveness of its compliance and ethics program, the complaint alleges that the directors did not discharge their duties in accordance with such policies.
The defendant directors and officers filed a motion to dismiss the proceeding in April, which is currently under review by the court. Among other defenses, the motion argues that the complaint does not adequately plead demand futility. Additionally, the motion asserts that the complaint is misleading and fails to state a claim for breach of fiduciary duty, arguing that in reality the directors recognized the importance of workplace safety and made a sustained effort to see that management implemented programs and policies to improve the company’s compliance. In particular, the directors received reports about the company’s OSHA compliance, workplace safety metrics and store crime rates. The company also implemented evolving compliance projects, including the addition of new safety compliance audits, the creation of a new compliance management position and cross-functional teams, and the development of accountability programs tied to safety compliance, among other measures.
As a reminder, to establish an oversight claim, a plaintiff must establish that (i) directors utterly failed to implement any reporting or information system or controls or (ii) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. Here, if the court holds that Conforti sufficiently demonstrated demand futility, its analysis will likely turn on whether, having implemented a system of controls, the Dollar General directors and officers consciously failed to monitor or oversee the company’s operations and ignored red flags. As discussed above, both parties to this proceeding acknowledge that the company has a number of internal policies and procedures addressing safety and compliance.
This case serves as an important reminder to directors and officers of their duty of oversight. It is not enough for a company to implement policies and procedures relating to oversight – directors and officers are required to take concrete steps to monitor a company’s operations and should pay attention to any problems brought to their attention. Corporate counsel to a company can assist directors and officers in reviewing corporate governance policies, employee handbooks and training procedures, as well as monitoring duty of oversight obligations by attending board meetings and documenting actions in response to any potential red flags.
For additional information or assistance regarding the duty of oversight and best practices for corporate governance, contact Matthew M. McDonald at mmmcdonald@klehr.com or Elizabeth Webb Bucilla at ebucilla@klehr.com.
Co-authors Matthew M. McDonald, partner and Elizabeth Webb Bucilla, associate are members of the Corporate & Securities Department at Klehr Harrison.