Delaware courts have firmly established that directors have oversight duties under the good-faith component of the fiduciary duty of loyalty. In the seminal Caremark decision, the Delaware Court of Chancery held that directors have an oversight duty to ensure that “information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning the corporation’s compliance with the law and business performance.” See In re Caremark International Derivative Litigation, 698 A.2d 959, 970 (Del. Ch. 1996). The court explained that a breach of a director’s oversight duty necessary to demonstrate a lack of good faith requires a “sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists … .” Ten years later, in Stone v. Ritter, the Delaware Supreme Court recognized two types of Caremark oversight claims against directors: “(a) the directors utterly failed to implement any reporting or information system or controls; [or] (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” 911 A.2d 362, 370 (Del. 2006). While the Stone v. Ritter decision only recognized the oversight duties of directors, three years later, the Delaware Supreme Court ruled that “the fiduciary duties of officers are the same as those of directors.” See Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009).

The Gantler decision did not address oversight duties specifically. But by equating officer duties with director duties, Gantler paved the way for the Court of Chancery’s recent decision in In re McDonald’s Corp. Shareholder Derivative Litigation, No. 2021-0324-JTL (Del. Ch. Jan. 25, 2023), which concluded that like directors, corporate officers also have a duty of oversight premised on the duty of loyalty within their corporate area of responsibility. To establish a breach of an officer’s duty of oversight, the officer “must consciously fail to make a good faith effort to establish information systems, or the officer must consciously ignore” and fail to address and report “red flags” upward through the corporate chain of command. The court emphasized that while the duty of oversight applies equally to officers, the duty is context-driven, such that the application of the oversight duty to officers may differ from that of directors, who have responsibility to oversee the company as a whole, and among officers, depending on the officer’s area of responsibility. The court explained, for example, that some officers, “like the CEO, have a companywide remit.” Other officers “have particular areas of responsibility, and the officer’s duty to make a good faith effort to establish an information system,” and “to address and report upward about red flags,” only applies within that officer’s corporate area of responsibility. The court noted, however, that “a particularly egregious red flag might require an officer to” report upward even if the red flag “fell outside the officer’s domain.”

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