In re McDonald’s Corporation Stockholder Derivative Litigation

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

Corporationsfiduciary dutiesofficer oversightsexual harassmentderivative litigationCaremarkStone v. Ritterofficer fiduciary duties

Facts

Fairhurst served as McDonald’s Global Chief People Officer from 2015 until his termination for cause in 2019, with day-to-day responsibility for the human resources function and promoting a safe and respectful workplace. During his tenure, McDonald’s faced coordinated EEOC complaints, employee walkouts and strikes, and public scrutiny over sexual harassment and misconduct, while employees alleged that human resources ignored complaints and employees feared retaliation. The complaint alleged that Fairhurst himself committed acts of sexual harassment in December 2016, November 2018, and inferably again in November 2019, and that after the November 2018 incident he was disciplined and signed a Last Chance Letter but remained in his role. Stockholders alleged both that Fairhurst consciously ignored red flags about sexual harassment at the Company and that his own acts of harassment independently breached fiduciary duty.

Issue

Whether Delaware law recognizes a fiduciary duty of oversight for corporate officers, and if so, whether the complaint stated a claim that Fairhurst breached that duty by consciously ignoring red flags about sexual harassment and misconduct within his area of responsibility. The court also considered whether Fairhurst’s own acts of sexual harassment could themselves state a claim for breach of the duty of loyalty.

Rule

Corporate officers owe a duty of oversight comparable to directors’ oversight duties, at least as to matters within their areas of responsibility. Officers must make a good-faith effort to establish reasonable information systems within their remit and must address or report upward red flags indicating corporate harm; liability for breach of this duty requires bad-faith, disloyal conduct, not merely carelessness. Separately, when a fiduciary engages in sexual harassment, the fiduciary acts for selfish reasons and not in the corporation’s best interests, thereby acting in bad faith and breaching the duty of loyalty.

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

Nora Patel is the chief compliance officer of Harbor Peak Logistics, a Delaware corporation based in Seattle. Over eighteen months, she receives repeated internal reports that regional managers in Oregon and Washington are falsifying safety records, but she never escalates the issue to the CEO or board and takes no corrective steps.

If stockholders bring a derivative claim alleging Nora breached her fiduciary duty, which is the strongest conclusion at the pleading stage?

Explanation. The majority recognized that corporate officers owe a duty of oversight comparable to directors, at least within their own areas of responsibility. An officer must make a good-faith effort to establish reasonable information systems within her remit and must address or report upward red flags indicating corporate harm. Liability requires bad-faith disloyal conduct, and repeated ignored compliance reports within the chief compliance officer’s domain support that inference at the pleading stage. (Derived from In re McDonald’s Corporation Stockholder Derivative Litigation (n.d.).)