Claims Against McDonald's Former Officer Survive

The Delaware Chancery Court denied a motion to dismiss claims against a former senior officer of McDonald's

Defendant David Fairhurst served as Executive Vice President and Global Chief People Officer of McDonald’s Corporation (“McDonald’s” or the “Company”) from 2015 until his termination with cause in 2019. In that position, Fairhurst was the executive officer with day-to-day responsibility for ensuring that one of the largest employers in the world provided its employees with a safe and respectful workplace.

In this action, stockholders of the Company have sued Fairhurst derivatively on the Company’s behalf. They allege that during Fairhurst’s tenure as the head of human resources, he breached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct. They assert that Fairhurst’s fiduciary duties included a duty of oversight, which required that he make a good faith effort to establish an information system that would generate the information necessary to manage the Company’s human resources function. They maintain that Fairhurst had a duty to use the resulting information to do his job and to report on his areas of responsibility to the CEO and the board. Those duties, they say, demanded that he address or report upward about any red flags regarding sexual harassment and misconduct at the Company. The plaintiffs do not allege that Fairhurst failed to make a good faith effort to establish information systems. They argue instead that Fairhurst breached his duty of oversight by consciously ignoring red flags.

Fairhurst has moved to dismiss the oversight claim under Rule 12(b)(6) for failing to state a claim on which relief can be granted. Fairhurst contends that Delaware law does not impose on officers any obligations comparable to the duty of oversight articulated by Chancellor Allen in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

This decision clarifies that corporate officers owe a duty of oversight. The same policies that motivated Chancellor Allen to recognize the duty of oversight for directors apply equally, if not to a greater degree, to officers. The Delaware Supreme Court has held that under Delaware law, corporate officers owe the same fiduciary duties as corporate directors, which logically includes a duty of oversight. Academic authorities and federal decisions have concluded that officers have a duty of oversight.

The fact that corporate directors owe a duty of oversight does not foreclose officers from owing a similar duty. Just as a junior manager with supervisory duties can report to a senior manager with supervisory duties, so too can an officer with a duty of oversight report to a board of directors with a duty of oversight. And just as a senior manager with supervisory duties can hold a junior manager accountable for failing to fulfill the junior manager’s supervisory duties, so too can a board with a duty of oversight hold an officer accountable for failing to fulfill the officer-level duty.

Although the duty of oversight applies equally to officers, its context-driven application will differ. Some officers, like the CEO, have a company-wide remit. Other officers have particular areas of responsibility, and the officer’s duty to make a good faith effort to establish an information system only applies within that area. An officer’s duty to address and report upward about red flags also generally applies within the officer’s area, although a particularly egregious red flag might require an officer to say something even if it fell outside the officer’s domain. As with the director’s duty of oversight, establishing a breach of the officer’s duty of oversight requires pleading and later proving disloyal conduct that takes the form of bad faith.

Fairhurst thus owed a duty of oversight. He had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm.

Fairhurst next argues that even if he owed a duty of oversight, the plaintiffs have failed to allege sufficient facts to state a claim against him. The plaintiffs have identified red flags indicating that sexual harassment occurred at the Company. They also have alleged facts supporting a reasonable inference that Fairhurst knew about the red flags. The analysis comes down to whether Fairhurst acted in bad faith by consciously ignoring the red flags.

Holding

The plaintiffs have pled a claim against Fairhurst for breach of the duty of oversight. The plaintiffs also have pled a claim against Fairhurst for breach of the duty of loyalty based on the specific acts of sexual harassment in which he engaged. Fairhurst’s motion to dismiss under Rule 12(b)(6) is denied.

(Mike Frisch)