Delaware Court Rejects Motion to Dismiss Lawsuit Against Boeing Board Members for Failure to Conduct Proper Compliance Oversight (Part III of III)
The Delaware Chancery Court is continuing its trend of permitting Caremark claims against corporate board members who fail to exercise proper oversight and monitoring of compliance programs. The Delaware Court’s latest decision involving the Boeing board and its failure to conduct proper oversight of the 737 MAX safety scandal is yet another example. At bottom, the Chancery Court is raising the stakes on board member accountability.
The Boeing 737 MAX scandal is a troublesome and disturbing case where corporate board oversight and responsibility was lacking. The implications of the board’s failure resulted in the killing of innocent passengers and the grounding of Boeing’s 737 MAX. Add to that a $2.5 billion settlement, a criminal case against a Chief Technical Pilot, and continuing safety and technical problems, and you have recipe for continuing disaster at Boeing.
The implications of these recent cases have to be understood – the Delaware Court is not altering the well-ingrained Caremark standard. Instead, the Court is applying the Caremark standard to reject motions to dismiss thereby allowing cases to proceed to discovery and litigation. The risks for corporate board members are increasing and the Delaware Court is clearly sending a message – board members have to attend to compliance programs and relevant risks or face the risk of personal liability.
The Delaware Court has provided another important decision relating to Boeing’s 737 MAX safety scandal. The Boeing case stems from the Lion Air crash in October 2018 and the Ethiopian Airlines crash in March 2019. The crashes were the direct result of a lack of pilot training on the Maneuvering Characteristics Augmentation System (“MCAS”).
In the Delaware Chancery Court, several plaintiffs made books and records demands and filed derivative lawsuits in 2019. Plaintiffs asserted breach of fiduciary duty claims against Boeing’s directors, specifically (i) Boeing did not implement a reporting system to monitor the safety of Boeing’s airplanes; (ii) Boeing ignored red flags and its duty to investigate; and (iii) the Board terminated the CEO and allowed the CEO to cash out his equity compensation.
The Caremark standard requires plaintiffs to allege facts that either: (1) the directors utterly failed to implement any reporting or information system or controls; or (2) 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.”
On the first prong, board oversight for “mission critical” issues must be “rigorously exercised,” which involves “sensitivity to compliance issues intrinsically critical to the company.” The Court ruled that the plaintiffs had adequately alleged claims against the director defendants.
In support of its finding, the Court cited the fact that the board had no committee charged with direct responsibility to monitor airplane safety, and the Board at large was not formally monitoring or discussing safety on a regular basis. The Court cited the fact that, following the Lion Air crash, the Board meeting agenda did not include a specific discussion of safety but instead focused on restoring profits and efficiency. In particular, the Court cited Board discussions of 737 MAX issues were “passive invocations of quality and safety . . . [that] fall short of the rigorous oversight [Caremark] contemplates.”
Second, the Court explained that the Board did not require management to deliver regular reports on safety issues. Specifically, the Court cited Boeing’s defective reporting structure and management communicated with the board only on an ad hoc basis concerning safety issues. The Court noted that the board was “passively accepting management’s assurances and opinions.”
Finally, the Court noted documentary evidence indicating that board members were aware of the importance of safety issues and that the board knew that its safety oversight procedures needed to be improved.
The Court also ruled that the plaintiffs stated a claim under prong two of Caremark, based on allegations that the Board “passively accepted” management’s assurances that the 737 Max was safe, and that it did not take action in the face of red flags – most significantly, the Lion Air crash of the 737 MAX.