In a January 25, 2023, opinion in the McDonald’s case that has become known as McDonald’s I, Delaware Vice Chancellor Travis Laster held, as discussed in detail here, that liability for breach of the duty of oversight can extend to corporate officers as well as to directors. While there have been subsequent cases that have raised breach of the duty of oversight claims against officers, there have been no published decisions analyzing the duty of oversight as pertains to officers — that is, until now.

In a short December 14, 2023, opinion that emphasizes the high bar for oversight claims against officers, Vice Chancellor Lori Will dismissed claims that the personal transportation device company Segway brought against its former President. VC Will expressly rejected any suggestion that the standard to plead an oversight breach claim against a corporate officer is any lower than the high standards applicable to oversight claims against directors. A copy of VC Will’s opinion can be found here.

Background

Segway manufactures personal transportation devices. In April 2015, Segway was acquired by Ninebot (Beijing) Tech Co. Ltd. After the acquisition Segway continued to operate as it had pre-acquisition, with its own officers and accounting systems. In December 2015 Judy Cai was appointed Segway’s President, a role in which she served until November 2020.

Due to declining sales, Segway shrunk its work force and closed facilities, and, after Cai’s termination, Segway integrated its financial information into Ninebot’s systems. Segway later claimed that it became apparent that financial information Cai had previously provided Ninebot did not match the actual numbers in Segway’s financial records.

In December 2022, Segway commenced a breach of fiduciary duty action against Cai. As VC Will later put it, “one would be forgiven for assuming that Segway’s allegations underlie a breach of the duty of care.” Segway, Will said, “disavowed any such claim,” and instead “insists that it is pursuing a different theory against Cai for breaching her duty of oversight.” (VC Will seemed to be somewhere between surprised and stunned that Segway was basing its claim on allegations of breach of the duty of oversight rather than breach of the duty of care, returning to emphasize this point again later in her opinion.)

In support of its breach of the duty of oversight claims against Cai, Segway alleges that Cai “knew or should have known that there were potential issues” that caused Segway’s accounts receivable to rise. Segway alleges that Cai breached her fiduciary duties as an officer by “continuously ignoring these issues” and by failing to address them or to advise the Segway board. Cai filed a motion to dismiss.

The December 14, 2023, Opinion

In a compact December 14, 2023, VC Will granted Cai’s motion to dismiss, holding Segway had failed to present sufficient allegations to state a claim for breach of the duty of oversight (sometimes called a Caremark claim) against Cai.

VC Will opened her opinion by observing that “Segway appears to believe that the high bar to plead a Caremark claim is lowered when the claim is brought against an officer.” This, VC Will said, “is a distressing reading of our law.” VC Will emphasized that liability under this theory can only attach in the rare case where fiduciaries knowing disregard oversight obligations and trauma ensues.” She added that “despite a proliferation of modern jurisprudence, bad faith remains a necessary predicate” and Caremark’s “attempt to hold a corporate officer accountable for unexceptional financial struggles flouts these enduring principles.”

VC Will noted that in McDonald’s I, VC Laster had observed that corporate officers “owe context-specific” duties of oversight comparable to those of directors. He emphasized, VC Will noted, that “barring extreme facts – an officer’s duty of oversight would only extend to matters within the officer’s remit.” Crucially, VC Will emphasized, Laster “did not (as Segway seems to intuit) craft a lower standard for oversight claims against officers.”

In applying these principles to Segway’s allegations against Cai, VC Will said that in order for the claims to fall within “the McDonald’s framework,” the oversight allegations would “need to fall within Cai’s sphere of corporate responsibility.” VC Will said Segway’s allegations against Cai “are an ill fit for a Caremark claim.” Segway, VC Will noted, merely alleges that Cai learned about “issues” with unspecified customers, revenue decreases or a product line, and increases in receivables. Such “generic matters,” VC Will said, “are far from the sort of red flags that could give rise to Caremark liability if deliberately ignored.”

The complaint, VC Will emphasized, “also lacks facts suggesting that Cai acted in bad faith.” While Segway, “with 20/20 hindsight,” wants Cai to answer for the decrease in sales and increase in receivables, oversight duties, VC Will said, are not “designed to subject fiduciaries to personal liability for failure to predict the future and to properly evaluate business risk.” VC Will went on to say:

The Caremark doctrine is not a tool to hold fiduciaries liable for everyday business problems. Rather, it is intended to address the extraordinary case where fiduciaries’ ‘utter failure’ to implement an effective compliance system or ‘conscious disregard’ of the law givers rise to a corporate trauma.’ These tenets of our law persist regardless of whether a Caremark claim is brought against a director or an officer. Officers’ management of day-to-day matters does not make them guarantors of negative outcomes from imperfect business decisions.

Discussion

A persistent thread in VC Will’s opinion is her desire to put to rest any suggest that the standard for a breach of the duty of oversight claim against a corporate officer is lower than for a director. Indeed, in the opinion’s final paragraph she returns to this theme, observing that “Segway’s claim rests on the misimpression that an oversight claim pursued against an officer is easier to plead than one against a director.” She emphasized, citing well-established Delaware case law, that “irrespective of the defendant’s corporate title,” a claim for breach of the duty of oversight is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”

VC Will also emphasized that not only is the standard for liability against officers for breach of the duty of oversight no lower than it is against directors, but that, at a minimum, a plaintiff pursuing an oversight claim against an officer “would need to demonstrate that the officer failed to make a good faith effort to monitor central compliance risks within her remit that pose potential harm to the company or others.” (She noted that “no such reasonably conceivable claim is stated here.”)

VC Will’s opinion in this case emphasizes three additional important points for understanding what she referred to in her opinion as the “McDonald’s framework,” in addition to underscoring that the standard of liability for breach of the duty of oversight for officers is no lower than it is for directors.

First, she emphasized that the officers’ duties of oversight are “context-specific,” and that “barring extreme facts,” and officer’s duty of oversight would only extend to matters “within the officer’s remit.”

Second, she further emphasized that “generic financial matters” are “far from the sort of red flags that could give rise to Caremark liability if deliberately ignored.” She added that “the Caremark doctrine is not a tool to hold fiduciaries liable for everyday business problems.” It only meant to address the “extraordinary case” where there was an “utter failure” to put an effective compliance system in place or “conscious disregard” of systems that are in place.

Third, addressing what might otherwise be a misperception about the pleading requirements for a Caremark claims arising from “a proliferation of modern jurisprudence” (read: recent Delaware case law that could be interpreted to suggest that Caremark claims might no be as difficult to plead as had been thought to be the case in the past), “bad faith remains a necessary predicate to any Caremark claim.”

VC Will seemed genuinely troubled that Segway was in effect trying to transform what she perceived as obviously a claim for breach of the duty of care into a claim for breach of the duty of oversight. Her perception was the Segway was motivated by an “intuition” that the McDonald’s framework had crafted a lower standard of oversight for claims brought against officers. VC Will wants the world to know that the standard for liability of breach of the duty of oversight is no lower for corporate officers than it is for directors.

In the wake of VC Laster’s McDonald’s I opinion, there were concerns that the floodgates for breach of the duty of oversight claims against corporate officers might have been opened. Corporate officers, their advisors, and their insurers will be reassured to know that not only is the standard of liability not lower for officers, but that officer oversight duties are ”context specific,” absent extreme facts; that generic financial matters are not the sort of red flags that trigger a Caremark claim; and bad faith remains an important predicate for Caremark liability.  The floodgates, VC Will seems to want us to know, have not been opened.