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Shearman & Sterling LLP Extension of Oversight Fiduciary Duties to Officers | 26 Extension of Oversight Fiduciary Duties to Officers Gillian Emmett Moldowan, Matthew Weston, and Janice Perri Officer fiduciary duties have recently garnered significant attention, especially following the Delaware Court of Chancery's decision (In Re McDonald's Corp.), in which the Court declined to dismiss a derivative stockholder suit brought on behalf of McDonald's Corporation against the corporation's former Chief People Officer for fiduciary duties of oversight and loyalty. 1 The recent attention to officer fiduciary duties may have a direct correlation with the increased scrutiny by regulators and stockholders of the conduct of officers, as well as board oversight and responses to such conduct. 2 In light of the increased scrutiny, corporations and their boards will benefit from reassessing their current oversight practices and implementing safeguards to mitigate potential risk of officer fiduciary duty-related liabilities. This article provides an overview for key considerations and recommendations for corporations and their boards to consider in evaluating current oversight and fiduciary duty-related practices with respect to officers. Duties of Care and Loyalty In 2009, the Delaware Supreme Court held that the officers of Delaware corporations owe a duty of care and duty of loyalty and that the fiduciary duties of officers are the same of those as directors. 3 The duty of loyalty acknowledges that officers, by virtue of their position within a corporation, are in a position of trust and confidence. As such, officers are not permitted to use this position of trust and confidence to seek personal gain or further private interests. Officers must not only promote and protect the interests of the corporation, but must also "refrain from doing anything that would work injury to the corporation." 4 The duty of care requires that officers exercise the appropriate degree of prudence in performing their duties. Officers must act with reasonable care and diligence when making decisions and acting for the corporation, which requires officers to be fully and adequately informed. If an officer is found to have acted in a self-interested manner or in bad faith, they will have breached their duty of loyalty. By contrast, if an officer is found to have acted in a grossly negligent manner, they will have breached duty of care. Recent Developments: Oversight Duties In January, in the first decision of its kind, the Delaware Court of Chancery expressly held that corporate oversight duties apply to not just directors, but also officers. In In Re McDonald's Corp., stockholders of McDonald's brought a derivative claim against the former McDonald's Chief People Officer for breach of the fiduciary duties of oversight and loyalty. The stockholder plaintiffs alleged that the officer "consciously ignore[ed] red flags" warning of sexual harassment within the corporation and himself engaged in sexual harassment of other employees. In sustaining the claims against the officer, the Court acknowledged that Delaware had not previously "expressly held that officers…owe oversight duties" like those owed by directors under Caremark and noted that "[t]his decision clarifies that corporate officers owe a duty of oversight." The Court found support for the application of oversight duties to officers from several sources. The Caremark decision is generally credited with establishing that directors are subject to the duty of oversight. 5 The Court highlighted that the reasoning of Caremark "applies equally to officers," and that 1 See In Re McDonald's Corp. S'holder Deriv. Litig., Case No. 2021- 0324-JTL (Del. Ch. January 25, 2023). 2 U.S. Securities and Exchange Commission, Securities Act of 1933 Release No. 11144, Securities Exchange Act of 1934 Release No. 96610, https://www.sec.gov/files/litigation/admin/2023/33-11144.pdf (January 9, 2023). 3 See Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009). 4 See Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). 5 In re Caremark International Inc. Derivative Litigation, 698 A.2d 959. Insights