The Delaware Court of Chancery recently ruled that officers of Delaware corporations can be personally liable for failing to properly oversee their respective corporations. This is the first Delaware ruling that has explicitly stated that officers of Delaware corporations have a duty of oversight.
The duty of oversight stems from the broader duty of loyalty, which requires that directors and officers act in good faith and in a manner that they reasonably believe is in the best interest of the corporation. Unlike with breaches of the duty of care,[1] directors and officers cannot be indemnified or exculpated for breaches of the duty of loyalty, D&O insurance does not often cover breaches thereof, and Delaware courts do not grant directors or officers any deference.
To succeed on a claim that a director, or now officer, breached their duty of oversight, a plaintiff must be able to prove that a director or officer acted in bad faith and either (i) failed to establish reasonable information systems to ensure they were receiving relevant material information to perform their duties, or (ii) disregarded and failed to respond to “reg flags” indicating wrongdoing.
In In re McDonald’s Corporation Stockholder Derivative Litigation, McDonald’s stockholders brought a derivative suit against the corporation’s “Chief People Officer,” the chief executive for human resources. In the suit, the stockholders claimed that systemic problems with sexual harassment in the company were widely known, but the CPO failed to make any substantive changes or report such issues to the board. The court ruled that if the facts alleged by plaintiff were true, the CPO could be personally liable for breaching his duty of oversight by disregarding these “red flags.”
The court did note that the duty of oversight for officers is often more limited in scope than it is for directors, who have company-wide oversight obligations. Officers will generally only be responsible for overseeing their respective departments, but they cannot turn a blind eye to “red flags” found elsewhere.
What Delaware Officers Should Do Now
Given this recent decision, Fortis Law Partners recommends the following:
- Officers should review their information systems to ensure officers are receiving relevant material information within their purview.
- As companies grow, officers should continue to revisit these systems to confirm they are still reasonable.
- Officers should ensure that corporate or department culture allows workers to report material issues to their superiors without fear of reprisal, and officers should always report material information and issues to the board.
- Finally, officers should review their D&O insurance coverage to see if they are covered for losses arising from willful or bad faith actions.
If you have questions about the responsibilities or liabilities of Delaware officers or need additional counsel on this matter, please contact a member of our team.
[1] The duty of care requires that directors and officers act on an informed basis with a reasonable degree of care under the circumstances.
