Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 27 | Extension of Oversight Fiduciary Duties to Officers officers "may have a greater capacity" than directors "to make oversight and strategic decisions on a day- to-day basis." The Court also noted that the Delaware Supreme Court held that "the fiduciary duties of officers are the same as those of directors." See Gantler v. Stephens. The Court found further support for an oversight duty from the officer's obligation, as an agent, "to provide information to the principal"—here, the board. According to the Court, a determination that officers do not have such a duty would "create a gap in the ability of directors to hold officers accountable." The Court did make two important clarifications in assessing breach of duty of oversight claims. First, that in its view, the "context-driven application" of the duty of oversight for officers will differ from that of directors and that "the board can tailor the officers' obligations and responsibilities." Therefore, while officers like a CEO have "company-wide remit," the scope of duty for those officers with "particular areas of responsibility" will be limited to that area. Nevertheless, the Court cautioned that "a particularly egregious red flag might require an officer to say something even if it fell outside the officer's domain." The second clarification is that consistent with establishing a breach of the duty of oversight owed by a director, "establishing a breach of the officer's duty of oversight requires pleading and later proving disloyal conduct that takes the form of bad faith." Therefore, to be held liable, the officer "must consciously fail to make a good faith effort to establish information systems, or the officer must consciously ignore red flags." Key Takeaways Attention should be given to ensuring that officers are properly informed of their fiduciary duties and that safeguards are in place to reduce potential officer fiduciary duty-related liabilities. The scope of the landscape of the fiduciary duties of officers continues to develop and remain in flux as regulators and stakeholders continue to increase their scrutiny on corporate practices (or oversight thereof). We expect that jurisprudence in this area will continue to be shaped in the coming years, and, as a result, corporations should stay ahead of the curve by implementing best practices now. Corporations should consider consulting advisors with expertise in this area to assist in developing plans and strategies and to stay up to date on corporate know-how. While the existence of a fiduciary duty to oversee an officer's area of responsibility is not wholly unexpected, the McDonald's decision leaves significant unanswered questions about how the scope of those duties would be interpreted in practice. These questions may eventually be resolved by the Delaware Supreme Court and, in the meantime, bear careful consideration. The following is an overview of key issues and recommendations for corporations and their boards to consider in evaluating current oversight and fiduciary duty-related practices with respect to officers. • Information Systems. Corporations should evaluate and give consideration to their existing reporting structures and information systems and controls to ensure that officers are receiving the necessary information to perform their duties and responsibilities, including monitoring potential red flag compliance concerns within their purview. • Defining an Officer's "Area of Responsibility." While areas of responsibility, may, of course, be shared across officer functions for business reasons, corporations may wish to undertake a review of existing delegations of responsibility with an eye toward clarifying overlap or potential areas of conflicting authority. Boards should consider working with the corporations' CEO, or directly with officers, to define each officer's duties and responsibilities and clarify any overlapping areas of responsibility among officers. What to do Next: Potential Safeguards and Protective Mechanisms