In January, I noted considerable concern over a decision by Delaware Vice Chancellor Travis Laster involving potential Caremark liability for McDonalds due to allegations of a pervasive atmosphere of sexual harassment. I also took issue with the suggestion in the opinion that an officer breaches his fiduciary duties by engaging in sexual harassment. It should go without saying, but in today's environment probably does need to be emphasized, that nothing in that post was intended to excuse (let alone endorse!) sexual harassment! It is a pernicious evil that deserves severe punishment. But through employment law not corporate fiduciary duties.
Others, such as Kevin LaCroix, expressed similar concern.
In expressing my concerns about the decision, however, I noted a safety valve:
VC Laster thereby transformed sexual harassment—and who knows how much more of employment and civil rights law—into cognizable corporate law claims.
To be sure, VC Laster anticipated just such a complaint:
Some might ask whether the Court of Chancery should be hearing sexual harassment claims and worry that recognizing such a claim will open the floodgates to employment-style litigation. ...
... Like an oversight claim, a claim for breach of duty based on the officer’s own acts of sexual harassment is derivative, so all of the protections associated with derivative claims apply.
But so what? Is Laster saying that if Fairhurst had moved to dismiss for failure to make demand on the board per Rule 23.1 that Fairhurst would have won?
Whether Fairhurst would have escaped liability remains uncertain, but in a very recent opinion VC Laster dismissed the claims against the defendant directors:
The plaintiffs are stockholders of the Company who have sued derivatively on its behalf. They allege that from 2015 until 2020, the Company’s directors ignored red flags about a corporate culture that condoned sexual harassment and misconduct. They contend that the Company suffered harm in the form of employee lawsuits, lost employee trust, and a damaged reputation. As defendants, they have named nine directors who served during the critical period (the “Director Defendants”).
In advancing this claim, the plaintiffs rely on the principle that corporate fiduciaries cannot act loyally and in the best interests of the corporation they serve if they consciously ignore evidence indicating that the corporation is suffering or will suffer harm. To state a claim under this theory, the plaintiffs must allege facts supporting an inference that the directors knew about a problem—epitomized by the proverbial red flag—yet consciously ignored it. The plaintiffs must do more than plead that the directors responded in a weak, inadequate, or even grossly negligent manner. The pled facts must indicate a serious failure of oversight sufficient to support an inference of bad faith.
Laster concludes that the defendant directors "knew about a problem with sexual harassment and misconduct at the Company," but he goes on the explain:
What the complaint does not support is an inference that the Director Defendants failed to respond. The confluence of events during 2018, including the revelations about the Global Chief People Officer, led to action. Throughout 2019, the Director Defendants engaged with the problem of sexual harassment and misconduct at the Company. They worked with Company management on a response that included (i) hiring outside consultants, (ii) revising the Company’s policies, (iii)implementing new training programs, (iv) providing new levels of support to franchisees, and (v) taking other steps to establish a renewed commitment to a safe and respectful workplace.
Given that response, it is not possible to draw a pleading-stage inference that the Director Defendants acted in bad faith. The pled facts do not support a reasonably conceivable claim against them for breach of the duty of oversight.
Good.
On a personal note, I was flattered that VC Laster cited some of my work in the course of his opinion: