Distressed Governance Tracker - In re: McDonald's Corporation Stockholder Derivative Litigation
In re: McDonald's Corporation Stockholder Derivative Litigation, C.A. No 2021-0324-JTL (Del. Ch. Jan. 26, 2023)
About the Author
The author, Michael R. Nestor, is Vice-Chair of the Firm, a member of the Firm’s Management Committee, and co-head of the Firm’s Portfolio Company Management Group.
RULING
In a case of first impression, the Delaware Court of Chancery found that the duty of care extends to directors AND officers based upon its review of Delaware and non-Delaware precedent, as well as theories of agency and accountability. However, unlike directors who have a duty regarding the entirety of the business, officer duties of care may be limited to her/his particularized area of responsibility within the business.
RESTRUCTURING LESSON
It remains to be seen how the Delaware Supreme Court will rule on the issue. Nevertheless, it is a reminder for all fiduciaries (directors, officers and otherwise) to be mindful of the duty of care in all aspects, including public safety (Boeing), disclosure of customer information (Bingle), or a culture of sexual harassment (McDonald’s).
ANALYSIS
Plaintiff alleged that while the company had a system to report and address instances of sexual harassment, it nonetheless maintained a culture of sexual harassment and the company’s management failed to address myriad “red flags.” Defendants argued that officers did not have a duty of care and, importantly, that no court in Delaware has found that to be the case. Concluding that officers, in fact, have a duty of care, Vice-Chancellor Laster relied upon (i) Delaware Supreme Court precedent supporting the proposition that officers are responsible for the same duties as directors (Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2003), (ii) non-binding precedent recognizing the duty of care for officers, and (iii) concepts of agency and accountability as between management and a board that support the extension of the duty of care. Interestingly, the Court also noted that the amendment of DGCL 102(b)(7) to include exculpation for officers supported its conclusion.
