In a short order released this month, Vice Chancellor Laster dismissed the same breach of oversight claims against Fairhurst that previously withstood Court of Chancery Rule 12(b)(6) muster.
We discussed in a prior Alert Vice Chancellor J. Travis Laster's extension of oversight duties and liability therefrom upon corporate officers. In In re McDonald’s Corporation Stockholder Derivative Litigation, Vice Chancellor Laster declined to dismiss claims against the company’s former Executive Vice President and Global Chief People Officer David Fairhurst for breach of the duty of oversight related to his disregard of, and alleged participation in, sexual harassment and misconduct taking place companywide. Fairhurst argued that Delaware law does not recognize oversight claims against officers. Vice Chancellor Laster disagreed, and for the reasons discussed in our February 13, 2023, Alert, held that Delaware law imposes on corporate officers “a fiduciary duty of oversight as to matters within their areas of responsibility.” 2023 WL 407668, *9 (Del. Ch. Jan. 26, 2023) (McDonald's I).
As also discussed in that prior Alert, while this decision provided answers to long-standing questions relating to the extension of oversight duties stemming from In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) onto corporate officers, it also brought about concerns regarding the potential increase of exposure to liability. Luckily for those who shared in this concern, Vice Chancellor Laster reminded us all that the requirement to plead demand futility under Court of Chancery Rule 23.1 will continue to serve as an important hurdle to a plaintiff’s success in the courtroom.
In a short order released this month, Vice Chancellor Laster dismissed the same breach of oversight claims against Fairhurst that previously withstood Court of Chancery Rule 12(b)(6) muster. See In re McDonald's Corp. S'holder Deriv. Litig., 2023 WL 2329711 (Del. Ch. Mar. 1, 2023) (McDonald's II). The Court held that while the plaintiffs’ claims against Fairhurst stated a claim on which relief could be granted, plaintiffs did not make a demand on McDonald’s board of directors, nor did they adequately plead demand futility. Id. at *1.
Under Delaware law, a shareholder may bring a derivative claim only if they: (1) make a demand on the company’s board of directors to pursue the claim at issue and the board wrongfully refuses the demand; or (2) allege with particularity that such demand on the company’s board of directors would be futile under the standard established in United Food & Commercial Workers Union v. Zuckerberg, 262 A.3d 1034 (Del. 2021). See Court of Chancery Rule 23.1; McDonald’s II, 2023 WL 2329711, at *1.
The United Food standard requires a plaintiff to plead that a majority of the directors on the board:
(i)… received a material personal benefit from the alleged misconduct that is the subject of the litigation demand; (ii)… would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and (iii)… lack[] independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand. United Food, 262 A.3d at 1059.
In McDonald’s II, plaintiffs asserted that the nine members of McDonald’s board of directors “faced a substantial risk of liability for the claims that the plaintiffs asserted against them, and those claims were so intertwined with the claim against Fairhurst that the director defendants could not act in a disinterested manner with respect to a demand.” 2023 WL 2329711, at *1. Vice Chancellor Laster acknowledged that plaintiffs’ theory had some merit in establishing demand futility, but did not meet the requisite threshold. Id. This was in part due to Vice Chancellor Laster's same day dismissal of plaintiffs’ claims against the director defendants. See generally In re McDonald's Corp. S'holder Deriv. Litig., 2023 WL 2293575, at *1-*2, *12 (Del. Ch. Mar. 1, 2023) (holding that plaintiffs failed to state a claim for breach of the duty of oversight against the nine director defendants as the complaint failed to show that the defendants either ignored the red flags presented to them or responded to the red flags presented to them in bad faith) (McDonald’s III). Vice Chancellor Laster held that this dismissal of the claims against the defendant directors in McDonald’s III, foreclosed plaintiffs’ demand futility argument, necessitating dismissal of the previously survived claims for breach of the duty of oversight against Fairhurst. McDonald’s II, 2023 WL 2329711, at *1.
These further developments do not diminish the Chancellor’s seminal ruling last month that Delaware law imposes on corporate officers “a fiduciary duty of oversight as to matters within [such officer’s] areas of responsibility,” but rather stresses that failure to abide by the procedural requirements of the Court will disqualify a claim regardless of its merit.
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