Last year, we discussed how stockholder complaints concerning environmental, social, and governance ("ESG") issues were making their way to the courtroom and, specifically, how the Delaware Court of Chancery and Supreme Court had, after a period of dormancy, revitalized the potential for director liability for failures of oversight as articulated in In re Caremark Int'l Derivative Litigation.1Caremark and its progeny articulated an obligation on the part of directors to implement effective "reporting or information system or controls"2 and to monitor them such that the board addresses "red flags" indicating potential misconduct.3 In In re McDonald's Corporation Stockholder Derivative Litigation,4 plaintiff-stockholders of McDonald's Corporation ("McDonald's" or the "Company") asserted claims for breach of fiduciary duty against McDonald's, its Board of Directors ("Board"), and certain officers relating to an alleged "corporate culture" that "condoned sexual harassment and misconduct."5 On January 26, 2023, Vice Chancellor J. Travis Laster denied a motion to dismiss filed by one of the company's officer-defendants, the former Executive Vice President and Global Chief People Officer, who argued that Plaintiffs failed to state a claim against him because, among other reasons, the duty of oversight applies only to directors and not officers. In denying the motion, the Court held that "corporate officers owe the same fiduciary duties as corporate directors, which logically includes a duty of oversight," reasoning that "[t]he same policies that motivated Chancellor Allen [in Caremark] to recognize the duty of oversight for directors apply equally, if not to a greater degree, to officers."6 However, the Court explained that the application of the duty of oversight to officers is "context-driven" and will depend on the officer's title and responsibilities.7 More broadly, Caremark claims have been described as "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment."8 But McDonald's represents yet another relatively recent decision where such claims have survived a motion to dismiss and in some instances moved to discovery, albeit on facts that differ in some ways from these other cases, most notably, Marchand v. Barnhill9 and In re Boeing Co. Derivative Litig.10 This raises questions about the state of Caremark oversight today and what recent caselaw means for directors and officers in understanding the scope of oversight obligations under Delaware law.
In 2015, McDonald's faced its first sales decline in over a decade and set out to shake up its leadership. Among other things, the Company hired Stephen J. Easterbrook as its CEO. Easterbrook had held various positions within the Company from 1993 until 2011, and then rejoined in 2013 as its Executive Vice President and Chief Brand Officer. After his promotion to CEO, Easterbrook "promptly promoted" David Fairhurst to Global Chief People Officer.11 The operative complaint pleads that Easterbrook and Fairhurst "promoted and participated in a 'party atmosphere'" at McDonald's corporate headquarters, where Company executives "participated in drinking excursions" at company events and "[m]ale employees (including senior corporate executives) engaged in inappropriate behavior . . . routinely making female employees feel uncomfortable."12 Over time, the Court opined that McDonald's "grew to resemble a boys club," and Fairhurst failed to "address complaints adequately" through his responsibilities as overseer of the human resources department.13
These types of issues began to attract media attention. Within a year of Easterbrook and Fairhurst taking over, McDonald's "began to face increasing public scrutiny about problems with sexual harassment and misconduct."14 The complaint alleges that dozens of employees filed multiple complaints with the Equal Employment Opportunity Commission, workers across the United States went on a one-day strike to protest management's failure to address the hostile work environment, and United States Senator Tammy Duckworth (D-WI) sent a letter to Easterbrook inquiring about the allegations and complaints.15 The Company's Compliance Department "evaluated" reports of allegations that Fairhurst himself had engaged in sexual harassment and the Board's Audit & Finance Committee discussed the incidents.16 While Fairhurst was permitted to remain with the Company,17 the Board and Company management worked to revise McDonald's harassment policies, provide training, offer support to franchisees, and engage outside experts to further advise the Company about preventing sexual misconduct and harassment.18 But in October 2019, the Board became aware that Easterbrook was engaged in a prohibited relationship with an employee, which violated Company policy. As a result, the Board and Easterbrook negotiated a separation agreement and then the Board terminated Easterbrook without cause. Shortly thereafter, McDonald's general counsel "updated the Board" about additional "employment matters related to [Fairhurst]." The meeting minutes do not explain what information was presented, but the Court concluded that, based on the context, "it is reasonable to infer at the pleading stage that Fairhurst engaged in an additional act of sexual harassment that violated the "Last Chance Letter."19 The Board then terminated Fairhurst for cause.20
After these issues came to light, stockholders sought information from the Company pursuant to Section 220 of the Delaware General Corporation Law and, thereafter, filed a derivative suit in the Delaware Court of Chancery against the Company, the Board, Easterbrook,21 and Fairhurst. The claims against Fairhurst were asserted for breach of fiduciary duty arising out of his inappropriate conduct with employees and for failing to exercise adequate oversight in response to sexual harassment and misconduct at McDonald's.22 Fairhurst moved to dismiss on the grounds that, among other things, no Delaware law "recognize[s] an oversight claim against corporate officers."23 The Court explained that while the duty of oversight generally applies equally to officers as it does to directors, the exact scope of oversight will differ for each officer depending on their responsibilities at the company.24 Here, the Court went on to find that Plaintiffs stated a well-pled claim against Fairhurst, including based on allegations from which the Court could reasonably infer that Fairhurst "knew about and played a role in creating the Company's problems with sexual harassment and misconduct, which led to the external signs that took the form of employee complaints and a ten-city strike."25 The Court also found that Plaintiffs stated a claim for breach of fiduciary duty of loyalty in connection with Fairhurst's own acts of sexual harassment, as those acts were not done to "further the best interests of the Company" and instead were done for "selfish reasons."26 The Court therefore denied the motion to dismiss and allowed Plaintiffs' allegations against Fairhurst to proceed.
- Corporate Officers Owe a Fiduciary Duty of
Oversight. The Court succinctly found that "this
decision clarifies that corporate officers owe a duty of
oversight."27 The Court explained that while this
is the first decision expressly finding an oversight duty for
officers, the holding is in line with Caremark itself and
Delaware Supreme Court precedent holding that "the fiduciary
duties of officers are the same as those of
directors,"28 and is well supported by other legal
principles, academic authorities, and decisions from other
jurisdictions.29 In support of his finding, Vice
Chancellor Laster observed that the three major reasons identified
by Chancellor Allen in Caremark for imposing oversight
obligations on directors, apply equally – if not more so
– to corporate officers. First, while Delaware
corporate law charges the board of directors with managing the
affairs of a company, it is the officers who actually manage the
day-to-day business operations and must supervise employees to keep
operations running.30Second, officers generate
and collate the timely and relevant information to pass on to the
board of directors to allow the board to effectively oversee
business operations. Accordingly, officers "must make a good
faith effort to ensure that information systems are in
place."31Third, the board's oversight
obligations stem, at least in part, from the corporation's
obligations under the federal Organizational Sentencing Guidelines
requiring compliance and ethics programs within a company. These
guidelines dictate that "high-level personnel," including
both directors and officer-executives, are responsible for
establishing these programs. Based on these three reasons, Vice
Chancellor Laster wrote that the "foundational premises for
recognizing the duty [of oversight] . . . easily encompass
officers" as well.32 The Court also found that
where a company has sufficient internal reporting systems in place,
officers are "optimally positioned to identify red flags and
either address them or report upward to more senior officers or to
- The Application of Officers' Oversight Duty is
"Context-Driven" and Depends on the Officer's
"Areas of Responsibility." Even though the Court
held that an officer's duty of oversight is
"comparable" to a director's duty, it explained that
this "does not mean that the situational application of those
duties will be the same" for officers and
directors.34 While directors are "charged with
plenary authority over the business and affairs of the
corporation," – i.e. "the buck stops with
Board" – officers generally have a more constrained area
of authority with specific responsibilities.35 Though
the CEO and COO "likely will have company-wide oversight
portfolios" and therefore duties akin to those of directors
(with the CEO likely also serving on the board), other officers
generally would face Caremark liability only for failing
to impose systems of reporting or ignoring red-flags within their
specified area of authority. As Vice Chancellor Laster wrote,
"[w]ith a constrained area of responsibility comes a
constrained version of the duty" to implement internal control
systems.36 Therefore, generally, officers will be
responsible for monitoring or reporting red flags only within the
purview of their responsibilities. Still, if a red flag were
"sufficiently prominent," any officer regardless of
delineated responsibilities "might have a duty to report
upward about it."37 For example, an officer could
not escape Caremark liability after receiving
"credible information that the corporation is violating the
law" and then "turn a blind eye and dismiss the issue as
'not in my area.'"38 Here, the Court found
that Fairhurst "had an obligation to make a good faith effort
to put in place reasonable information systems so that he obtained
the information necessary to do his job and report to the CEO and
the board, and he could not consciously ignore red flags indicating
that the corporation was going to suffer harm."39
- There Are Implications Flowing from the Principle that
Oversight Obligations Are An Aspect Of The Duty of
As the Delaware Supreme Court has explained, under Caremark, the oversight duty is an aspect of the duty of loyalty.40 The Delaware Supreme Court stated in Marchand that "to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it."41 Several consequences flow from that principle, including:
- Pleading and Proof: To adequately allege and plead an oversight
claim, a plaintiff must establish that the officer
"intentionally acts with a purpose other than that of
advancing the best interests of the corporation."42
Here, the Court found that plaintiffs adequately pled that
Fairhurst engaged in bad faith and failed to address red flags for
two reasons. First, the complaint supported a reasonable
inference that Fairhurst consciously ignored red flags. As Global
Chief People Officer, he was responsible for promoting a safe and
healthy work environment, yet the Company's human resources
department failed to take action in response to numerous harassment
reports during Fairhurst's tenure. The Court also stated that
Fairhurst himself committed multiple acts of sexual harassment and
it is "reasonable to infer . . . [he would] turn a blind eye
to red flags about similar conduct by
others."43Second, the Court found that
Fairhurst's own acts of sexual harassment, on their own,
constituted bad faith because they were committed "for an
improper purpose, unrelated to the best interests of the
- Exculpation: There are implications for an officer's
ability to invoke the company's bylaw exculpation provision.
Section 102(b)(7) permits stockholders to preclude monetary
liability on the part of directors and, since August 1, 2022,
officers, to the company and its stockholders for breaches of the
duty of care, but not breaches of loyalty. Officers facing
Caremark claims based on conduct pre-dating the amendment
are not able to benefit from the exculpation provision45
and, perhaps more importantly, could not invoke the provision in
the Caremark context regardless of when the conduct
occurred because, if properly pled and proven, Caremark
claims would state and prove a loyalty breach and fall outside a
Section 102(b)(7) charter provision.
- Pleading and Proof: To adequately allege and plead an oversight claim, a plaintiff must establish that the officer "intentionally acts with a purpose other than that of advancing the best interests of the corporation."42 Here, the Court found that plaintiffs adequately pled that Fairhurst engaged in bad faith and failed to address red flags for two reasons. First, the complaint supported a reasonable inference that Fairhurst consciously ignored red flags. As Global Chief People Officer, he was responsible for promoting a safe and healthy work environment, yet the Company's human resources department failed to take action in response to numerous harassment reports during Fairhurst's tenure. The Court also stated that Fairhurst himself committed multiple acts of sexual harassment and it is "reasonable to infer . . . [he would] turn a blind eye to red flags about similar conduct by others."43Second, the Court found that Fairhurst's own acts of sexual harassment, on their own, constituted bad faith because they were committed "for an improper purpose, unrelated to the best interests of the Company."44
- Questions Remain About Caremark's
Application Outside "Mission-Critical" Company Areas and
What Constitutes a "Mission-Critical" Area. In
In re Boeing46 and Marchand v.
Barnhill,47 Delaware courts permitted
Caremark claims to survive motions to dismiss based on
allegations that the boards failed to properly oversee
"mission-critical" aspects of the company. In
Boeing, the board allegedly did not establish a proper
control system and otherwise ignored red flags from public reports
related to the safety of the company's airplane fleet. In
Marchand, the board of Blue Bell Creameries USA Inc.
allegedly did not establish effective controls related to
overseeing the safety of the company's ice cream production
facilities. According to these courts, airplane and food safety,
respectively, were "mission-critical" to these
organizations. As described in Boeing,
"Marchand's mandate that the board rigorously
exercise its oversight function with respect to mission critical
aspects of the company's business, such as the safety of its
products that are widely distributed and used by consumers,"
such that the directors faced a "substantial likelihood of
liability" on the oversight claim for purposes of assessing
demand futility.48 And while Marchand indeed
used "mission-critical" phraseology, it also more
generally stated that Caremark "does require that a
board make a good faith effort to put in place a reasonable system
of monitoring and reporting about the corporation's central
compliance risks."49 (emphasis added).
At the same time, other recent Delaware decisions have dismissed Caremark claims, including in areas deemed "mission critical," where the board of directors took remedial action that turned out to be insufficient at rectifying red flags,50 made a good faith effort to establish board-level monitoring systems that proved to be insufficient,51 or where plaintiffs generally did not plead "sufficient particularized facts to support a reasonable inference of scienter and therefore actions taken in bad faith by the Board."52 In City of Detroit Police & Fire Ret. Sys.,53 the Court of Chancery addressed the "mission critical" aspect of a pipeline operating company maintaining pipeline safety. In Lending Club, the alleged failure of oversight involved compliance with consumer protection laws, presumably a core compliance function for a consumer lending company. And in Bingle, the plaintiffs alleged that an online service provider failed in its "mission critical" cybersecurity efforts.54 None of these decisions discussed any heightened obligations, or constraint on the application of oversight duties, based on whether the underlying issue was "mission-critical" or represented a "central compliance risk," perhaps because the courts found insufficient the allegations of an oversight breach in the first place. Indeed, the Bingle court observed that it need not address the extent to which the "decisions or omissions of Directors [are] reviewable under Caremark in such a scenario," i.e., where the Marchand "shibboleth" mission-critical applies but plaintiffs insufficiently plead "bad faith liability" on the part of directors for failing to oversee company operations.55
McDonald's (and Bingle for that matter) therefore raise questions about the importance of a "mission-critical" finding to the result on an oversight claim, at least at the pleading stage. Vice Chancellor Laster does not use the phrase "mission critical" anywhere in the McDonald's opinion, and the Court may have been suggesting a somewhat more expansive modern version of Caremark. The workplace environment, while undeniably a crucial aspect of the functioning of an organization, is not necessarily a unique feature of a particular company relative to other companies, but rather could be deemed important to success across the corporate landscape. It is unclear whether the Court would have considered workplace issues "mission-critical," or, at least tacitly, whether the Court rejected that label as not relevant to the viability of a Caremark claim. According to plaintiffs, McDonald's placed value on the workplace environment. The Court noted that McDonald's "prides itself on being 'America's best first job,'" and its policies called for constructing a workplace environment that "builds trust, protects the integrity of our brand and fuels our success."56 On the other hand, that issue did not receive a Tier 1 risk rating under the Company's internal risk assessment methodology. Rather, the Company's risk management system identified maintaining a "Respectful Workplace" in the "Top Tier 2" level.57 These risks are, according to McDonald's, not mission-critical: "Tier 1" risks are "[c]ritical to McDonald's mission and values," whereas McDonald's Tier 2 risks have the "[p]otential for sustained, negative impact to brand" and are "[m]ore likely to become Tier 1 risks given the circumstances."58 Read this way, and given the absence of any reference to mission-critical tasks in the opinion, the decision could be interpreted as moving beyond the mission-critical language of Marchand, Boeing, and other recent decisions analyzing Caremark claims.
- McDonald's Underscores The Importance For
Boards to Implement Systems to Monitor ESG-Related Issues, and
Promptly and Effectively Address Red Flags or Other Material
Information. While the McDonald's decision is
consistent with the existing Delaware authorities cited in the
opinion and is therefore not necessarily "new" law, it
does serve as an important reminder to officers and directors about
the importance of implementing internal controls and reporting
systems to enable companies to address corporate misconduct. This
is particularly important as plaintiffs increase pressure on
companies to address the impacts of various "ESG" issues,
such as compliance with safety regulations, assessment of
climate-related risks and opportunities, or, as here, harassment.
Whether or not the area is alleged or found to be mission-critical,
problems arising out of these areas of corporate activity very well
could have a material impact on the company at issue. And, at least
in some cases, the ESG issue in fact could wind up being found to
involve a mission-critical area or core compliance function.
Directors and officers therefore need to assess the extent and
quality of information monitoring systems in core-ESG areas and
then appropriately address information yielded by those
- Companies Should Bolster their Documentation of
Reporting Procedures and Otherwise Establish Clear Areas of Officer
Responsibility. In McDonald's, Vice
Chancellor Laster noted that the "absence of evidence from the
Section 220 production" showing that Fairhurst reported
incidents of sexual harassment to the board of directors supported
the inference that he acted in bad faith.59 Companies
should consider establishing at the officer level similar internal
documentation procedures as those used by the board of directors.
Because courts look to when and how officers respond to red flags
when assessing a Caremark claim, well-documented reporting
procedures will aid companies in defending against such claims.
Putting clear reporting systems in place, and documenting responses
to red flags, will allow officers to most effectively address bad
acts as they arise and ensure compliance with
Caremark's obligations. In establishing such
procedures, companies should also consider whether officer
responsibilities are clearly outlined and communicated to
employees. Delineating clear spheres of responsibility will assist
officers in establishing clear reporting procedures such that
potential misconduct is reported to the appropriate officer.
- Directors' and Officers' Duties of Loyalty
Encompass Oversight of Others and Their Own Conduct. Vice
Chancellor Laster was clear that "[s]exual harassment is bad
faith conduct. Bad faith conduct is disloyal conduct. Disloyal
conduct is actionable."60 The Court found that a
fiduciary can act in bad faith by intentionally acting with a
purpose other than one that advances the best interests of the
company. By violating company policy and committing acts of sexual
harassment, an officer acts disloyally, with an improper purpose,
and in a manner "unrelated to the best interests" of the
company.61 These constitute unique claims, separate from
any employment-related litigation stemming from the same bad acts.
When the company suffers harm resulting from fiduciaries committing
sexual harassment, stockholders will likely be permitted to utilize
derivative claims and have the opportunity to "shift [any]
loss that the entity suffered to the human actor who caused
it."62 Of course, proving damages could be a
challenge, and companies should put in place effective
anti-harassment and anti-discrimination policies, as well as
mandate training for fiduciaries.
- Plaintiffs may Face Difficulty Establishing
Damages. The facts of McDonald's reflect a
somewhat extreme case; not only did Fairhurst commit his own
wrongful acts in the course of holding his position, but the
corporate culture that he was charged with overseeing garnered the
attention of politicians, prompted strikes in several cities, and
exposed the Company to several class action lawsuits. Plaintiffs
who allege well-documented misconduct or damaging events in support
of a Caremark claim (e.g., Marchand,
which stemmed from a listeriosis outbreak from Blue Bell
Creameries' products) appear to have more success overcoming a
motion to dismiss. But proving damages in connection with
Caremark claims based on relatively more isolated
incidents of misconduct committed by an individual actor within the
company may prove more challenging. Indeed, in McDonalds,
the Court noted this decision is not likely to release a
"flood of new employment-style claims" against companies
as the "protections associated with derivative claims [still]
- Litigation Tip: Beware Redactions. The Court of Chancery normally permits redactions when producing Section 220 documents for "material unrelated to the subject matter of the demand."64 But in its production of books and records pursuant to Section 220, the Court noted that McDonald's "raise[d] questions" with its redactions.65First, the Company redacted a portion of a sentence in an "otherwise responsive sentence within a responsive paragraph."66Second, the Company redacted an entire paragraph of the minutes of a special session to specifically discuss the issue of sexual harassment.67Lastly, the Company made five redactions on a single-topic memorandum related to building a respectful workplace.68 The Court observed that the outcome of the case was not impacted by the redactions and did not conclude whether McDonald's should provide unredacted versions of these records. But the Court implied that it would look closely at the context of how and why corporate documents were created and find redactions inappropriate where there is "no reason to think" that the redactions were implemented to remove non-responsive material.69 While not outcome-dispositive here, counsel's credibility with the Court is crucial, and overly aggressive redactions (particularly if not for privilege) may cause more harm than benefit for the company.
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1. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
2. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006)
3. Jason Halper et al., Caremark and "Mission-Critical" ESG Company Operations, Cadwalader, Wickersham & Taft LLP (February 28, 2022), https://www.cadwalader.com/resources/clients-friends-memos/caremark-and-mission-critical-esg-company-operations.
4. In re McDonald's Corp. S'holder Derivative Litig., No. 2021-0324-JTL, 2023 WL 387292 (Del. Ch. Jan. 26, 2023)
5. Id. at *1.
8. Marchand v. Barnhill, 212 A.3d 805, 820 (Del. 2019).
9. Marchand, 212 A.3d 805 (Del. 2019).
10. In re Boeing Co. Derivative Litig., No. CV 2019-0907-MTZ, 2021 WL 4059934, at *24 (Del. Ch. Sept. 7, 2021).
11. Fairhurst had previously served as McDonald's Vice President and Chief People Officer for Europe. McDonald's, 2023 WL 387292 at *3.
12. Id. at *4.
15. Id. An additional seven Senators joined a letter sent the following summer inquiring more specifically about sexual harassment at the Company and other workplace safety issues. Id. at *6.
16. Id. at *5.
17. McDonald's "ostensibly" had a zero-tolerance policy, but Easterbrook successfully recommended to the board that Fairhurst instead forfeit 50% of his bonus payments for 2018 and execute a "Last Chance Letter" documenting his harassing behavior. Id.
19. Id. at *7.
21. Easterbrook succeeded on his motion to dismiss for the "plainly dispositive" reason that a previously negotiated settlement agreement between him and the Company provided that the Company "irrevocably and absolutely releases and forever discharges Easterbrook" from all potential claims McDonald's (or stockholders suiting on its behalf) could bring against him. See In re McDonald's Corp. Stockholder, No. 2021-0324-JTL, 2023 WL 266519, at *1 (Del.Ch. Jan. 16, 2023).
22. McDonald's, 2023 WL 387292, at *8.
23. Id. at *9.
24. Id. at 1.
25. Id. at *2.
26. Id. at *3.
27. Id. at *1.
28. Id. at *13. (citing to Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009).
29. Id. at *13-14.
30. Id. at *10-11.
31. Id. at *11.
32. Id. at *12.
34. Id. at *18.
35. Id. at *19.
39. Id. at *2.
40. Marchand v. Barnhill, 212 A.3d 805, 820 (Del. 2019).
41. Id. at 821.
42. McDonald's, 2023 WL 387292, at *28.
43. Id. at *27.
44. Id. at *29.
45. See Del. Code Ann. tit. 8, § 102 ("No such provision shall eliminate or limit the liability of a director or officer for any act or omission occurring prior to the date when such provision becomes effective.").
46. In re Boeing Co. Derivative Litig., 2021 WL 4059934.
47. Marchand, 212 A.3d 805.
48. In re Boeing Co. Derivative Litig., 2021 WL 4059934, at *26.
49. Marchand, 212 A.3d 805, at 824.
50. Richardson as Tr. of Richardson Living Tr. v. Clark, No. CV 2019-1015-SG, 2020 WL 7861335 (Del. Ch. Dec. 31, 2020) ("LendingClub").
51. City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock, No. CV 2021-0370-KSJM, 2022 WL 2387653 (Del. Ch. June 30, 2022)
52. Constr. Indus. Laborers Pension Fund v. Bingle, No. 2021-0940-SG, 2022 WL 4102492, at *14 (Del. Ch. Sept. 6, 2022) ("Bingle").
53. City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock,, 2022 WL 2387653.
54. Bingle, 2022 WL 4102492, at *1.
55. Id. at *1-2.
56. McDonald's, 2023 WL 387292, at *7.
59. Id. at *27.
60. Id. at *30.
61. Id. at *29.
62. Id. at *30.
63. Id. at *29-30.
64. Id. at *5, n.2.
67. Id. n.3.
68. Id. n.4.
69. Id. n.2.
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