email@example.com, linkedin.com/in/rebecca-walker-605a944/) is a Partner in the Santa Monica, California, office of Kaplan & Walker LLP.(
In its seminal 1996 decision of In re Caremark Int’l Inc. Derivative Litigation, the Delaware chancery court held that directors have a fiduciary duty to oversee a company’s compliance systems. The parameters of that duty have been explored in a number of recent cases. In January 2023, in the case of In re McDonald’s Corporation Stockholder Derivative Litigation, the Delaware courts, for the first time, directly addressed the question of whether the Caremark oversight duties also apply to a company’s officers. (Spoiler alert—the court answered that question with a resounding “yes.”) It is a detailed and interesting decision—one well worth exploring for the court’s discussion of both (1) an officer’s duty to oversee a compliance program and (2) the Caremark line of cases.
This article will first provide a quick overview of the McDonald’s case to set the stage, then offer a brief (but important) review of Caremark and its progeny. We will then take a closer look at McDonald’s and its implications for compliance programs. As a bonus, we also consider two interesting procedural aspects of shareholder derivative litigation with which compliance professionals may want to be familiar.
McDonald’s Derivative Litigation
The McDonald’s case is a shareholder derivative action against McDonald’s directors and certain officers, including the company’s former chief people officer (CPO). The case alleges that the directors and officers failed to satisfy their fiduciary duty to oversee the McDonald’s compliance program considering pervasive sexual harassment concerns at the company—including sexual harassment allegedly perpetrated by the CPO. The decision we are concerned with relates only to the claims against the CPO, who was an officer but not a director of McDonald’s. The CPO argued the court should dismiss the claims against him on the grounds that officers do not have a fiduciary duty to oversee a company’s compliance program akin to a director’s Caremark duties. The court disagreed, holding that corporate officers do, in fact, have a fiduciary duty to oversee a company’s compliance systems.
Caremark and its line of cases
To fully appreciate the McDonald’s decision, it is essential to undertake a brief refresh of Caremark and its progeny. The Caremark court held that directors of a corporation have a dual obligation of compliance oversight:
To ensure that information and reporting systems exist that are sufficient to provide “senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning . . . the corporation’s compliance with law;” and
To appropriately respond to red flags indicating serious potential non-compliance.
However, the court in Caremark also made clear that the standard for liability in Caremark cases is high. Despite this high bar, in several recent cases, Delaware courts have permitted Caremark claims to proceed and created guidance for companies seeking to ensure effective board oversight practices.
In 2019, the Delaware Supreme Court decided Marchand v. Barnhill, a case concerning a listeria outbreak at Blue Bell Creameries. The Delaware Supreme Court focused its analysis not on that board’s general compliance oversight systems but instead on the board’s oversight of compliance systems in the company’s most significant risk area given its line of business (food safety). The court thus highlighted the importance of a board’s oversight of compliance systems directed at those risk areas that are “intrinsically critical to the company,” as well as general compliance oversight.
In 2021, the Delaware Chancery Court decided In re Boeing Company Derivative Litigation, a derivative suit stemming from the 2018 and 2019 crashes of the Boeing 737 MAX airplane. As in Marchand v. Barnhill, the Boeing court focused on the board’s failure to implement and monitor compliance systems in that company’s mission-critical risk area (airplane safety) in holding that the suit should be allowed to proceed. Both Boeing and Marchand thus highlight the importance of the board’s oversight of both general compliance and compliance systems in mission-critical risk areas.