Our Client Alert discusses a recent decision by the Delaware Court of Chancery in which the court determined that officers (not just directors) owe a fiduciary duty of oversight under Delaware law. The case, In re McDonald’s Corporation Stockholder Derivative Litigation, involved derivative claims asserted by stockholders of McDonald’s against its board of directors and certain officers, including its former Chief People Officer, who was the subject of the court’s decision resolving his motion to dismiss the claims against him. The court’s decision clarifies an important but previously uncertain area of Delaware law pertaining to officers’ fiduciary duties. Significantly, the court also concluded that sexual harassment committed by the executive was itself a breach of his fiduciary duty of loyalty.
Boards and officers will undoubtedly consider the implications of this decision within their own organizations—including with regard to employment agreements and the protections available to officers, such as the indemnification of officers by corporations and directors’ and officers’ insurance. Delaware corporations could begin to see more claims against officers for breach of their oversight responsibilities, much as we have seen against directors in recent years. That said, corporations and their counsel may take some comfort in the court’s determination that “bad faith” is required, rather than a lesser negligence standard. We also expect that there could be further development in the law pertaining to when stockholders can bring these claims, as compared to boards of directors, who generally control claims alleging harm to the corporation. Where a stockholder seeks to bring such an action, it will still need to show that the board is disabled from considering a litigation demand. There will be conversation about this case in the months ahead, and we will monitor any appeals.