In re McDonald's Corp. Stockholder Derivative Litigation

Court of Chancery of the State of Delaware · 2023 · Corporations

CorporationsFiduciary dutiesOversightCorporate officersCaremarkStone v. Ritterofficer oversightred flags

Facts

Fairhurst served as McDonald's Global Chief People Officer from 2015 until he was terminated for cause in 2019, with day-to-day responsibility for the human resources function and for promoting a safe and respectful workplace. During his tenure, the company faced coordinated EEOC complaints, employee walkouts and strikes, and public scrutiny concerning sexual harassment and misconduct, while employees allegedly viewed HR as ignoring complaints and retaliation fears. The complaint also alleged that Fairhurst himself committed acts of sexual harassment in December 2016, November 2018, and again in 2019 after receiving discipline and signing a Last Chance Letter. Plaintiffs alleged he consciously ignored red flags about sexual harassment and that his own misconduct independently breached fiduciary duty.

Issue

Do Delaware corporate officers owe a fiduciary duty of oversight comparable to directors' oversight duty, at least within their areas of responsibility? If so, did the complaint state a claim that Fairhurst breached that duty by consciously ignoring red flags, and did his own acts of sexual harassment independently state a loyalty claim?

Rule

Corporate officers owe a duty of oversight under Delaware law. Officers must make a good-faith effort to establish reasonable information systems within their areas of responsibility, and they must address or report upward red flags indicating corporate harm; liability for breach requires bad-faith, disloyal conduct, not mere carelessness. A fiduciary who personally engages in sexual harassment acts for an improper, selfish purpose rather than the corporation's best interests and thereby breaches the duty of loyalty.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Logistics, Inc., a Delaware corporation based in Seattle, employs Lena Ortiz as Chief Compliance Officer. Over two years, Lena receives repeated internal audit summaries showing that warehouse managers in Arizona and Nevada are falsifying hazardous-material shipping records, but she neither investigates nor informs the CEO or board. After federal penalties and customer claims, stockholders sue derivatively on the corporation's behalf.

Which is the strongest basis for denying Lena's motion to dismiss the oversight claim?

Explanation. The majority recognized that corporate officers owe a fiduciary duty of oversight. For officers, the duty is generally context-specific and tied to the officer's domain. An officer must make a good-faith effort to use information systems and address or report upward red flags within that area. Liability requires bad-faith, disloyal conduct, not mere occurrence of misconduct or strict liability. Lena's compliance role and alleged conscious inaction in the face of repeated reports fit that rule. (Derived from In re McDonald's Corp. Stockholder Derivative Litigation (n.d.).)