Client Alert

As discussed in the last article, McDonald’s, a recent Delaware chancery court decision, expands Caremark liability to officers. 

But at the end of the day, one might ask, beyond giving bankruptcy trustees an extra set of potential defendants, what sort of advantage does McDonald’s give bankruptcy trustees?

The primary advantage that McDonald’s gives bankruptcy trustees is that the reason for the high bar for Caremark claims arguably does not apply to claims against officers and only applies to claims against directors.

As background, courts dismissing Caremark claims almost always quote Caremark for the proposition that such claims are “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” 

Indeed, as Vice Chancellor Glasscock has colorfully observed, to say that a Caremark claim is one of the “most difficult of claims” to prove is “one of the hoariest of Chancery clichés.”  Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, No. 2019-0816, 2020 WL 5028065, at *1 (Del. Ch. Aug. 24, 2020).

But given that Caremark is a chancery court decision and the Delaware Supreme Court recognized such oversight liability in Stone v. Ritter, 911 A.2d 362 (Del. 2006), Ritter—not Caremark—is binding precedent.

So, how does the Ritter court interpret the Caremark “clichéd” quotation? 

The Ritter court explains that the reason that Caremark liability is such a “difficult theory” is that most corporate decisions are “not the subject of director attention.”  911 A.2d 362, 372 (emphasis added).

But that reasoning does not appear to apply to officer oversight claims, which McDonald’s authorizes.

Indeed, as the McDonald’s court recognizes, officers “as the day-to-day managers” of the business are “far more able to spot problems than part-time directors who meet a handful of times a year.”  McDonald’s Corp. Stockholder Derivative Litig., 289 A.3d 343, 362 (Del. Ch. 2023).

Moreover, based on Rule 2004 of the Federal Rules of Bankruptcy Procedure, counsel for bankruptcy trustees will often be able to obtain and review officers’ emails and depose them before filing suit.  Such emails and testimony should assist in pleading a Caremark claim.

In conclusion, McDonald’s appears to give bankruptcy trustees a very helpful tool in asserting D&O claims.

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