In re McDonald's Corporation Stockholder Derivative Litigation
Unreported Decision, 2023 WL 363290 (Del. Ch. Jan. 25, 2023) (2023)
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Rule of Law:
Corporate officers owe a fiduciary duty of oversight, which requires a good faith effort to establish information systems within their areas of responsibility and to address or report upward about red flags indicating corporate harm; liability for breach of this duty, as with directors, requires a showing of bad faith. Additionally, an officer’s personal acts of sexual harassment constitute a breach of the duty of loyalty because such conduct is not subjectively in the corporation’s best interests.
Facts:
- In 2015, McDonald's hired Stephen J. Easterbrook as CEO, who then promoted his close personal friend David Fairhurst to Global Chief People Officer, and Fairhurst relocated to the Chicago headquarters.
- Easterbrook and Fairhurst promoted a "party atmosphere" at the Chicago headquarters, where employees frequently drank alcohol at company-affiliated events, and male senior executives, including Fairhurst, engaged in inappropriate behavior and flirting with female employees.
- Under Fairhurst's oversight, McDonald's human resources department allegedly failed to adequately address sexual harassment complaints, leading to reports from former managers that HR leaders ignored complaints and employees feared retaliation.
- Beginning in October 2016, McDonald's faced increasing public scrutiny over sexual harassment, including coordinated EEOC complaints from workers in various cities and employee walkouts and strikes in over thirty cities.
- In December 2016 and again in November 2018, David Fairhurst himself engaged in acts of sexual harassment; the November 2018 incident was witnessed by over thirty Company employees and reported to the Company’s Compliance Department.
- In December 2018, the Board's Audit & Finance Committee disciplined Fairhurst for the November 2018 incident and a prior unreported incident from December 2016, requiring him to sign a "Last Chance" letter but allowing him to retain his position.
- In November 2019, Fairhurst was terminated for cause, inferably due to another act of sexual harassment that violated his "Last Chance" letter, shortly after Easterbrook was also terminated for a prohibited relationship with an employee.
- Following Easterbrook's and Fairhurst's departures, multiple class-action lawsuits (the Ries Action in November 2019 and the Fairley Action in April 2020) were filed against McDonald's, alleging a pervasive toxic culture of sexual harassment and ineffective HR support.
Procedural Posture:
- Stockholders of McDonald's Corporation filed a derivative action in the Delaware Court of Chancery on the Company’s behalf, alleging that defendant David Fairhurst breached his fiduciary duties.
- A group of plaintiffs who had previously sought books and records intervened in the action, and the action was stayed pending resolution of their efforts to conduct an investigation.
- Once the investigation was complete, the current plaintiffs filed a consolidated complaint that added David Fairhurst and Stephen J. Easterbrook as defendants.
- Defendant Fairhurst moved to dismiss Count III of the operative complaint, which asserted claims against him for breach of fiduciary duty, under Rule 12(b)(6) for failing to state a claim on which relief could be granted.
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Issue:
1. Does a corporate officer owe a fiduciary duty of oversight under Delaware law, comparable to that owed by directors, requiring a good faith effort to implement information systems and to address or report red flags within their area of responsibility? 2. Do a corporate officer's personal acts of sexual harassment constitute a breach of the duty of loyalty, thereby exposing the officer to liability?
Opinions:
Majority - Laster, V.C.
Yes, corporate officers owe a fiduciary duty of oversight under Delaware law, comparable to that owed by directors, which requires a good faith effort to establish information systems and to address or report red flags within their area of responsibility, with liability for a breach requiring a showing of bad faith. The court clarified that the same policies motivating Chancellor Allen to recognize the duty of oversight for directors in In re Caremark International Inc. Derivative Litigation apply equally, if not more, to officers, given their day-to-day management roles. The Delaware Supreme Court's holding in Gantler v. Stephens that officer and director fiduciary duties are the same logically extends the duty of oversight to officers. Furthermore, officers, as agents, have specific duties to provide information to their principals (the board), encompassing what they know, have reason to know, or should know. A contrary holding would create a gap in the board's ability to hold officers accountable for overseeing the corporation's daily affairs. The court found that Fairhurst, as Global Chief People Officer, had day-to-day responsibility for human resources and was obligated to be aware of and address red flags. His personal engagement in multiple acts of sexual harassment and the alleged failure of his HR department to address complaints supported a reasonable inference that he consciously ignored red flags, acting in bad faith. Yes, a corporate officer's personal acts of sexual harassment constitute a breach of the duty of loyalty. The duty of loyalty requires undivided and unselfish loyalty to the corporation, demanding no conflict between duty and self-interest. When Fairhurst engaged in sexual harassment, he was not acting subjectively to further the best interests of McDonald's but for selfish reasons. Such conduct is directly against the corporation's interests, potentially damaging employee morale, driving away talented individuals, and exposing the company to liability, thereby constituting bad faith and a breach of the duty of loyalty.
Analysis:
This landmark decision significantly expands the scope of fiduciary duties in Delaware, explicitly extending the Caremark duty of oversight to corporate officers. By holding officers to a similar standard of bad faith in monitoring and responding to red flags, the ruling emphasizes that accountability for corporate misconduct extends beyond the boardroom to senior management. This could lead to increased scrutiny of officer conduct, particularly in areas like human resources and compliance, and empower stockholders (via derivative suits) and boards to hold officers personally liable for systemic failures or personal misconduct that harms the corporation. It reinforces the principle that fiduciaries must act in the best interests of the corporation, even in their personal conduct impacting the workplace.
