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Most are familiar with the facts of the crashes of Boeing’s 737 MAX.  Later Boeing stockholders brought a claim that Boeing’s directors failed them in overseeing mission-critical airplane safety to protect enterprise and stockholder value.  The Delaware Court of Chancery issued an opinion that these Caremark claims survived a motion to dismiss.

The Court noted that at the pleading stage, a plaintiff must allege particularized facts that satisfy one of the necessary conditions for director oversight liability articulated in Caremark, either that:

  • the directors utterly failed to implement any reporting or information system or controls; or
  • having implemented such a system or controls, the directors consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.

The Court explained Caremark does not constitute a freestanding fiduciary duty that could independently give rise to liability.  A showing of bad faith is a necessary condition to director oversight liability.  In re Walt Disney Co. Derivative Litigation established that the intentional dereliction of duty or conscious disregard for one’s responsibilities, that is more culpable than simple inattention or failure to be informed of all facts material to the decision, reflects that directors have acted in bad faith and cannot avail themselves of defenses grounded in a presumption of good faith. Accordingly, in order to plead a derivative claim under Caremark, a plaintiff must plead particularized facts that allow a reasonable inference the directors acted with scienter which in turn requires proof that a director acted inconsistently with her fiduciary duties, but also that the director knew she was so acting.

Throughout the opinion the court looked to the precedent in MarchandMarchand addressed the regulatory compliance risk of food safety and the failure to manage it at the board level, which allegedly allowed the company to distribute mass quantities of ice cream tainted by listeria. Food safety was the “most central safety and legal compliance issue facing the company.” In the face of risk pertaining to that issue, Marchand noted the board’s oversight function “must be more rigorously exercised.” That, according to the opinion, “entails a sensitivity to compliance issues intrinsically critical to the company.”

Marchand held the board had not made a “good faith effort to put in place a reasonable system of monitoring and reporting” when it left compliance with food safety mandates to management’s discretion, rather than implementing and then overseeing a more structured compliance system. The Court considered the absence of various board-level structures “before the listeria outbreak engulfed the company.” The Court concluded that the complaint fairly alleged several dispositive deficiencies, such as the absence of a board committee that addressed food safety and the absence of a regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed.

The Court concluded that Plaintiffs had carried their pleading burden that the Boeing directors had utterly failed to implement any reporting or information system or controls. According to the Court, like food safety in Marchand, airplane safety “was essential and mission critical” to Boeing’s business, and externally regulated. To support its conclusion, the Court looked to several facts such as:

  • The Boeing Board had no committee charged with direct responsibility to monitor airplane safety.
  • The Board did not monitor, discuss, or address airplane safety on a regular basis.
  • The Board had no regular process or protocols requiring management to apprise the Board of airplane safety; instead, the Board only received ad hoc management reports that conveyed only favorable or strategic information.
  • Management saw red, or at least yellow, flags, but that information never reached the Board.

In addition to the inferences drawn above, the Court found the pleading-stage record supported an explicit finding of scienter.  Here the Court looked to internal emails amongst Board members stating things like “we should devote the entire board meeting (other than required committee meetings and reports) to a review of quality within Boeing,” The Court also noted that the Board knowingly fell short was also evident in the Board’s public crowing about taking specific actions to monitor safety that it had not actually performed.

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