The Court of Chancery recently dismissed claims for breach of fiduciary duty, breach of the duty of oversight, and waste against the board of directors of McDonald’s Corporation.
In In re McDonald’s Corp. Stockholder Derivative Litigation, C.A. No. 2021-0324-JTL, stockholders of McDonald’s filed a derivative action against the Company’s board of directors, former CEO, and former Global Chief People Officer emanating from the Company’s upsurge in sexual harassment. The claims against the former CEO were dismissed earlier in the proceedings, and on January 26, 2023, the Court issued a monumental decision of Delaware law that denied the former Global Chief People Officer’s motion to dismiss, holding that officers of a Delaware corporation, like its directors, owe a duty of oversight. That decision can be found here.
Regarding the claims against the director defendants, the complaint alleges that they breached their duty of oversight because they knew of the sexual harassment outbreak at the Company but failed to respond. The facts pled supporting the inference that the director defendants knew include complaints filed with the Equal Opportunity Employment Commission, a ten-city strike organized by Company workers, the Company received an inquiry from a U.S. Senator regarding sexual harassment, and the former Global Chief People Officer committed sexual harassment in 2016 and 2018.
The complaint also alleges that the director defendants breached their fiduciary duties by hiring the former CEO in the first place knowing that he was in an intimate relationship with a consultant; by disciplining the former Global Chief People Officer rather than firing him after he committed sexual harassment in 2018; and by terminating the former CEO without cause after discovering that he had an intimate relationship with a Company employee. The complaint further alleges that the director defendants committed waste by entering into a separation agreement with the former CEO that allowed him to retain millions of dollars and provided little benefit to the Company in exchange.
The director defendants moved to dismiss on multiple grounds, including for failure to state a claim upon which relief can be granted under Rule 12(b)(6).
The Court first addressed the claim for breach of the duty of oversight. The Court explained that, although the complaint pled facts supporting the inference that red flags came to the director defendants’ attention, it did not allege facts supporting the inference that the director defendants acted in bad faith in response to those flags. The director defendants adopted a new anti-harassment policy, retained outside advisors to assist the Company, reviewed the Company’s training programs, provided new support to franchisees, and ended the Company’s previous policy mandating arbitration of harassment and discrimination claims as a condition of employment. Therefore, the Court held that the complaint did not plead a claim for breach of the duty of oversight.
Regarding the claims for breach of fiduciary duty for hiring the former CEO, disciplining rather than firing the former Global Chief People Officer, and terminating the former CEO without cause, and for waste by allowing the former CEO to retain millions of dollars in compensation while obtaining little in return, the Court held that the business judgment rule protects these decisions and dismissed these claims. Therefore, all claims against the director defendants were dismissed.