David Rein, Deputy Managing Partner of S&C’s Litigation Group, spoke to Agenda about the implications of a recent Delaware Chancery Court ruling holding, for the first time, that officers have oversight duties. In its January 25 decision the court extended oversight duties from directors to also cover corporate officers when it declined to dismiss shareholder derivative claims against David Fairhurst, McDonald’s former head of human resources. The plaintiffs alleged that Fairhurst and current and former board members allowed “a culture of harassment” to exist at the company. In a later ruling, the Delaware court dismissed the claims against the directors, allowing only the claims against the officer to proceed.
David noted that the decision could face challenges in light of an earlier Delaware Supreme Court decision appearing to limit the scope of oversight claims to “mission critical” matters for the corporation. That ruling concerned the Blue Bell Creameries’ board’s oversight of safety in connection with a listeria outbreak that led to consumer fatalities, a nationwide recall, and a liquidity crisis. ”[T]raditionally, oversight claims have been limited to mission critical functions,” David said. “That’s a term that the Delaware courts have used, and an HR issue is not necessarily mission critical, however serious it may be.”
David also pointed out the distinction between McDonald’s and Marchand. “In Marchand, there was a listeria outbreak that killed people, and of course, did serious harm beyond that to the product and business, the fundamentals of the business,” he said. “That’s not the case with what happened at McDonald’s.” He added that sexual misconduct allegations are “serious for the people involved” and “serious for corporate culture,” but that the court “refrained from characterizing HR issues as mission critical.”
Rein said he wouldn’t be surprised if the case made it to the Delaware Supreme Court. If so, its “breadth could well be narrowed.”
Read “Execs Could Be Sued for Oversight Failures After McDonald’s Case.”