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On March 1, 2023, the Delaware Court of Chancery dismissed two breach of fiduciary duty claims against the board of a global fast-food company: (i) for failing to take action to address “red flags” indicating that sexual harassment and misconduct were occurring at the company; and (ii) in connection with various executive employment decisions. In re McDonald’s S’holder Derivative Litig., 2023 WL 2293575 (Del. Ch. Mar. 1, 2023) (Laster, V.C.). On the same day, the court also issued a Rule 23.1 order dismissing—on the ground of demand futility—the remainder of plaintiffs’ derivative lawsuit, which asserted breach of fiduciary duty claims against the company’s former Global Head of HR, related to the allegations of sexual harassment and misconduct at the company. Previously, in January 2023, the court had denied dismissal of the breach of fiduciary duty claims[1] against the former Global Head of HR, on the basis of its groundbreaking holding that officers, in addition to directors, have a duty of oversight.[2]

Because plaintiffs had not made a demand on the company’s board before commencing their lawsuit, the court explained that their claims against the former Global Head of HR were subject to dismissal unless they could plead demand futility under the three-part test in UFCW Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034 (Del. 2021).[3] Plaintiffs had asserted that demand on the board was futile and should be excused because the board faced a “substantial risk of liability” from plaintiffs’ claims. However, as discussed below, because the court dismissed these claims on March 1, demand on the board was not excused, and the court stated in its Rule 23.1 order that “the road to establishing demand futility that the plaintiffs sought to travel is closed.”  

Plaintiffs Failed to State a “Red-Flags” Claim Against the Board

In its March 1 decision, the court held that plaintiffs failed to state a claim against the board for breach of the duty of oversight under the second prong of In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), for failing to take action to address red flags indicating that sexual harassment and misconduct were occurring at the company. The court explained that “[a]lthough they have pled facts supporting an inference that red flags came to the attention of the Director Defendants, they have not alleged facts supporting a reasonable inference that the Director Defendants acted in bad faith in response to those red flags.” The facts supporting the inference that the board was on notice included, among other things, a second round of coordinated EEOC complaints, a ten-city strike, a Congressional inquiry, and that the board learned in December 2018 that the CEO had personally engaged in two acts of sexual harassment. However, the court determined that plaintiffs’ allegations fell short regarding the board’s response to the red flags, noting that at the end of 2018 the board began taking various responsive steps that included, among other things, hiring outside consultants, revising the company’s policies, implementing new training programs, providing new levels of support to franchisees, and setting up an employee hotline. 

Plaintiffs Failed to State a Claim Related to the Board’s Decision-Making

On March 1, the court also held that plaintiffs failed to state a claim against the board for breach of fiduciary duty in connection with three executive employment decisions[4] because the business judgment rule protected each decision. The court applied the business judgment rule because “[n]one of the established situations in which enhanced scrutiny applies are present in this case, rendering that standard inapplicable.” The court went on to determine that plaintiffs failed to plead facts sufficient to rebut any of the business judgment rule’s presumptions, which are that “in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805 (Del. 1984).