Vice Chancellor J. Travis Laster's recently ruled that McDonald's Corporation's former Executive Vice President and Global Chief
People Officer, David Fairhurst, owed a duty of oversight comparable to the duty articulated by Chancellor Allen in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). In re McDonald's Corp. Stockholder Deriv. Litig., C.A. No. 2021-0324-JTL. Today's post does not question the ruling, but does question why the case is in Delaware and why Delaware law is being applied.
Although McDonald's Corporation was incorporated in Delaware, its principal executive office is in Chicago and I assume that Mr. Fairhurst was employed in Illinois and not in Delaware. So why is Mr. Fairhurst subject to the personal jurisdiction of the Court of Chancery? Vice Chancellor Laster provides the explanation:
The absence of an earlier decision holding that officers owe oversight duties likely has a more practical explanation. Before January 1, 2004, Delaware’s jurisdiction-by-consent statute did not extend to officers. See Del. S.B. 126, 149th Gen. Assem., 81 Del. Laws ch. 83 (2003). After that date, stockholder plaintiffs moved slowly to name officers as defendants. Only recently has naming officers as defendants become more frequent, prompting the General Assembly to authorize exculpation for officers for stockholder claims, albeit not for claims by or in the name of the corporation, effective August 1, 2022. Del. S.B. 273, 151st Gen. Assem., 83 Del. Laws ch. 377 (2022).
The fly in the ointment ( Ecclesiastes 10:1) is that the Delaware's jurisdiction-by-consent statute is constitutionally suspect. See Will Mallory Doom Delaware's Officer Exculpation Statute And Its Corporate Hegemony?
Another question is why Delaware law would be applicable to Mr. Fairhurst who was an agent of McDonald's. Under Section 291 of the Restatement (Second) Conflict of Laws, the rights and duties of a principal and agent toward each other are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the parties and the transaction under the principles stated in Section 6 of the Restatement. In many cases, the corporation and the officer may have specified a choice of law in an employment agreement, equity award agreement or plan, severance agreement, or other employment agreement. See Officers And The Business Judgment Rule.