In January, the Delaware Chancery Court dropped a bit of a bombshell on Corporate America when it refused to dismiss Caremark claims against a former McDonald’s officer premised on failures of oversight that resulted in a corporate culture that condoned sexual harassment and misconduct. The plaintiffs also asserted Caremark claims premised on the same alleged oversight failures against McDonald’s current and former directors, but last week, Vice Chancellor Laster dismissed those claims. This excerpt from Fried Frank’s memo on the decision lays out some of the key takeaways:
On the one hand, McDonald’s appears to expand the potential for Caremark liability beyond the parameters many legal analysts had understood to apply. In the two decisions issued in the case, the court has articulated or clarified, for the first time, that: (i) Caremark duties of oversight apply not only to directors but also to officers; (ii) Caremark duties apply not only to a company’s “mission critical risks” but, depending on the facts, may apply to other key risks even if not rising to the level of “mission critical”; and (iii) sexual harassment and similar issues—and, indeed, “maintaining workplace safety” and “tak[ing] care of the corporation’s workers”—are mission critical risks for companies.
On the other hand, however—and perhaps most importantly as a practical matter— McDonald’s reinforces that there is a high bar to a finding of Caremark liability. The court emphasized that it is only when directors or officers act in bad faith that Caremark liability arises. The court stressed that directors or officers who acted to address a problem of corporate misconduct once they learned of it generally would not be deemed to have acted in bad faith, even if the actions they took were insufficient or reflected poor decision-making (so long as they were not so off the mark as to suggest bad faith).
The memo says that this decision is not inconsistent with the prior decision involving the McDonald’s officer because unlike the corporate officer, the directors took action to address the company’s sexual harassment problem when they were made aware of it. Kevin LaCroix weighed-in on this decision this morning on The D&O Diary, and you should be sure to check out his commentary as well.
Many commenters expressed concern about the implications of the earlier decision, particularly the expansion of Caremark beyond oversight of existential risks. UCLA’s Stephen Bainbridge – who has always been dubious of Caremark – has some insightful & colorful thoughts on that decision as well as this one. Prof. Bainbridge gets a lot of points from me for mentioning Arch Oboler, one of the truly great writers of the radio era and a guy to whom I think shows like HBO’s “True Detective” owe an unacknowledged debt.
– John Jenkins