Early this year, on January 25, 2023, the Delaware Court of Chancery extended the duty of oversight required of a corporation’s directors to its corporate officers, in In re McDonald’s Corp. Stockholder Derivative Litigation, No. 2021-0324-JT, 2023 Del. Ch. LEXIS 23 (Jan. 25, 2023). Before McDonald’s, the Delaware standard had been governed by the 1996 decision in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). Caremark held that corporate directors breach their duty of oversight if they:
- Fail to ensure effective information and reporting systems exist; or
- Ignore the red flags indicating wrongdoing, when the director (i) knows of the red flags, (ii) consciously fails to take action, and (iii) the failure to take action was sufficiently sustained, systematic, or striking as to constitute bad faith.
The reasoning in Caremark was adopted by the Delaware Supreme Court, again only recognizing the oversight duties for directors. See Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).Continue Reading Recapping the McDonald’s Delaware court decision – Duty of oversight and D&O considerations