In Re The Boeing Company Derivative Litigation
N/A - Court of Chancery Memorandum Opinion (2021)
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Rule of Law:
Directors face a substantial likelihood of liability for breaching their fiduciary duties of oversight under Caremark if they utterly fail to implement any reasonable reporting or information system for mission-critical regulatory compliance risks, or, having implemented such a system, consciously fail to monitor its operations by ignoring red flags that disable them from being informed of risks.
Facts:
- A 737 MAX airplane manufactured by The Boeing Company (Boeing) crashed in October 2018, killing all 189 people onboard, due to the Maneuvering Characteristics Augmentation System (MCAS) repeatedly forcing the plane's nose down.
- In March 2019, a second 737 MAX airplane crashed, killing all 157 people onboard, similarly caused by MCAS repeatedly activating despite pilots following emergency procedures.
- Boeing's corporate culture had shifted from prioritizing engineering and safety to emphasizing profits and rapid production, particularly after its 1997 acquisition of McDonnell Douglas.
- In 2011, the Boeing Board approved the development of the 737 MAX, a reconfigured version of the 737 NG, to compete with Airbus's A320neo, with primary concern for speed and cost, and delegated all authority for its final specifications and production to CEO McNerney without requiring further Board approval.
- The 737 MAX's MCAS software, designed to prevent pitching up, relied on a single Angle of Attack (AOA) sensor, creating a 'single point of failure,' and Boeing engineers' proposals for synthetic airspeed to detect false AOA signals were rejected due to cost and pilot training concerns.
- Boeing's technical pilots deceived the Federal Aviation Administration (FAA) by failing to disclose that the revised MCAS activated solely on the AOA sensor signal, and withheld November 2016 text messages from a pilot admitting he 'lied to the regulators' about MCAS from the FAA until October 2019.
- Before the crashes, Boeing employees reported intense pressure to maintain rapid production schedules for the 737 MAX, leading to safety concerns, but these complaints did not reach the Board.
- From 2011 until April 2019, Boeing's Board had no committee specifically tasked with overseeing airplane safety, nor a regular process or protocols requiring management to apprise the Board of airplane safety, instead relying on ad hoc, management-initiated communications.
Procedural Posture:
- Derivative actions alleging corporate harm were filed in the Court of Chancery of the State of Delaware in 2019.
- The Court consolidated these actions and appointed NYSCRF and FPPA as Co-Lead Plaintiffs on August 3, 2020.
- Plaintiffs filed the Verified Amended Consolidated Complaint on January 29, 2021.
- On March 19, Defendants filed a Motion to Dismiss pursuant to Court of Chancery Rules 12(b)(6) and 23.1.
- The parties briefed the Motion by June 4, and the Court heard oral argument on June 25, taking the Motion under advisement.
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Issue:
Does a majority of The Boeing Company's (Boeing) directors face a substantial likelihood of liability for breaching their fiduciary duties of oversight by utterly failing to implement a reasonable information and reporting system for airplane safety or by consciously disregarding red flags about 737 MAX safety, thereby excusing demand futility for a derivative lawsuit?
Opinions:
Majority - Zurn, Vice Chancellor
Yes, a majority of Boeing's directors face a substantial likelihood of liability for breaching their fiduciary duties of oversight by utterly failing to implement a reasonable information and reporting system for airplane safety and by consciously disregarding red flags about 737 MAX safety, thereby excusing demand futility for a derivative lawsuit. However, the claim regarding the former CEO's retirement compensation is dismissed. The Court applied the Rales v. Blasband test for demand futility, which assesses whether a majority of the current board members face a substantial likelihood of liability for their role in the alleged wrongdoing. It found that the plaintiff's Caremark claim survived under both prong one (utter failure to implement a system) and prong two (conscious failure to monitor an existing system by ignoring red flags). For Caremark Prong One, the Court found the Board utterly failed to implement any reporting or information systems or controls for airplane safety, which was 'essential and mission critical' to Boeing's business and externally regulated. This was evidenced by the absence of a board committee specifically tasked with monitoring airplane safety (the Audit Committee focused on financial risks), lack of regular Board discussions on airplane safety before the second crash, and the absence of regular protocols requiring management to apprise the Board of safety. Instead, management provided only ad hoc, self-directed reports, often downplaying safety issues. Management also knew of significant safety defects and employee concerns but did not report them to the Board. The Court also found explicit scienter, as former director Collins's email to Lead Director Calhoun advocating for a dedicated product safety review demonstrated directors knew what the Board should have been doing. Calhoun’s false public statements about the Board's oversight further indicated knowledge of their shortcomings. For Caremark Prong Two, the Court held that even assuming existing reporting systems, the Board consciously ignored the Lion Air Crash and subsequent revelations about the unsafe 737 MAX, which constituted major red flags. The Board passively accepted management's assurances that the 737 MAX was safe, despite widespread media reports, and formally decided in February 2019 to 'delay any investigation' into the 737 MAX after the first crash. Regarding the CEO compensation claim, the Court dismissed it, finding that plaintiffs failed to plead particularized facts showing a substantial likelihood of liability for waste or bad faith. The decision to allow former CEO Muilenburg to retire with unvested equity, while potentially motivated by a desire to avoid further public criticism, was a reasonable exercise of business judgment to avoid further reputational and financial harm to the company.
Analysis:
This case significantly reinforces the Caremark doctrine, particularly Caremark Prong One, as applied and clarified by Marchand v. Barnhill. It underscores that in industries with 'mission-critical' regulatory compliance risks, boards have a heightened duty to implement and oversee specific, robust information and reporting systems. The decision clarifies that a board's passive acceptance of management's assurances, even in the face of widespread public and internal warnings, can be sufficient to establish the 'bad faith' element required for Caremark liability. This ruling offers a clear roadmap for plaintiffs alleging Caremark claims, showing that a lack of formal safety committees, regular reporting protocols, and documented discussions about critical safety issues can be determinative, especially when coupled with evidence of directors' knowledge of these deficiencies.
