Delaware Company Officers Liable for Breach of Duty of Oversight

By Jed Weiner

In January 2023, the Delaware Court of Chancery ruled that Delaware officers can be liable for breach of the duty of oversight (In Re McDonald’s Corp. S’Holder Litig., C.A. No. 2021-0324-JTL (Del. CH. Jan. 25, 2023). This was the first Delaware decision to clearly state that officers, and not just directors, can be liable for breach of the duty of oversight.

The court stated that an officer has “an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm.” The court stated that the officer must show bad faith to breach the duty of oversight, e.g. ignore red flags, to breach the duty of oversight.

In response to this ruling, company officers should implement protocols for oversight and reporting for matters within their responsibilities. Companies may decide to provide officers with broader insurance coverage or indemnification agreements that cover this risk and/or to exculpate officers for breach of oversight claims in the Company charter.