On March 1, 2023, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed derivative claims brought by stockholders for breach of the fiduciary duty of oversight under Caremark
against the directors of McDonald’s Corporation (the “Company”). The decision follows the Court’s earlier decision to deny a motion to dismiss similar claims brought against the Company’s officers and to extend the Caremark
duty to corporate officers, as discussed here
. In re McDonald’s Corp. S’holder Deriv. Litig.
, Case No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023).
The Court found that plaintiffs did not adequately plead facts supporting an inference that the directors acted in bad faith when they failed to respond to red flags relating to sexual harassment. Plaintiffs alleged that from 2015 until 2020, the Company’s directors ignored red flags about a corporate culture that condoned sexual harassment and misconduct, asserting that corporate fiduciaries who consciously ignore evidence of harm to the company have not acted loyally. The Court noted that the allegations showed that the directors were aware of the red flags, but the complaint did not support the inference that directors failed to respond, making it “not possible to draw a pleading-stage inference that the Director Defendants acted in bad faith.”
The Court reviewed the duty of oversight claim under In re Caremark International Inc. Derivative Litigation
, 698 A.2d 959 (Del. Ch. 1996), specifically a “Red-Flags Claim.” The Court noted that while Caremark
liability could extend to the failure to monitor and react to sexual harassment, “plaintiffs must plead facts supporting [both] an inference that the red flags came to the attention of the Director Defendants” and “that the Director Defendants consciously failed to take action in response to the red flags.” The Court noted that while the directors were indisputably aware of red flags, they also took action in response, calling special meetings to address the issue, receiving updates, and terminating the CEO. The Court observed that even if those actions did not ultimately fix the problem, that was not sufficient to plead a Caremark
claim, observing that “[f]iduciaries cannot guarantee success, particularly in fixing a sadly recurring issue like sexual harassment. What they have to do is make a good faith effort.”
The Court also rejected plaintiffs’ claim that the directors breached their fiduciary duties by terminating the Company’s CEO without cause, despite having grounds to terminate for cause. Plaintiffs claimed that the directors did so to avoid litigation and potential liability for supposedly failing to thoroughly investigate the CEO. The Court noted that the pleading-stage record showed that the directors carefully considered whether to terminate the Company’s CEO without cause and found no reasonably conceivable facts that the directors breached their duty of care or acted in self-interest. Accordingly, the Court held the decision was protected by the business judgment rule, even if the decision ultimately proved to be a good-faith error. The Court likewise rejected plaintiffs’ claim for corporate waste, finding that the termination without cause was not so extreme as to infer the bad faith necessary to sustain such a claim.