In Re The Boeing Company Derivative Litigation, C.A. No. 2019-0907-MTZ (Del. Ch. Sept. 7, 2021) (Zurn, V.C.)

In this memorandum opinion, the Court of Chancery denied a motion to dismiss for Caremark claims against directors (the “Director Defendants”) of The Boeing Company (“Boeing” or the “Company”), determining that the stockholder-plaintiffs showed that making a demand on Boeing’s Board of Directors (the “Board”) with respect to the derivative claims would have been futile, given that plaintiffs pled particularized facts demonstrating that a majority of the Director Defendants faced a substantial likelihood of liability as to all but one of the claims.  The Court, however, granted the motion to dismiss derivative claims against Boeing’s officers (the “Officer Defendants” and, together with the Director Defendants, the “Defendants”) because plaintiffs failed to adequately plead that the Board was incapable of objectively considering whether to maintain a claim against the Officer Defendants. 

This litigation arose out of two fatal airplane crashes involving faulty software in Boeing’s 737 MAX airplanes. The first crash occurred in October 2018 (the “Lion Air Crash”), and the second in March 2019 (the “Ethiopian Airlines Crash”).  These tragedies caused preventable loss of life, the grounding of Boeing’s entire 737 MAX fleet in March 2019, and financial and reputational harm to the Company. 

The stockholder-plaintiffs brought Caremark claims, alleging that the Defendants failed to fulfill their oversight duties with respect to airplane safety issues and that demand on the Board was excused.  Defendants moved to dismiss under Rule 23.1.

At the outset, the Court noted that, under the Supreme Court’s reasoning in Marchand v. Barnhill, because airplane safety was “essential and mission critical” to Boeing’s business and externally regulated, the Board was required to “rigorously exercise its oversight function” with respect to airplane safety issues.  Under this framework, the Court held that plaintiffs sufficiently pled Caremark claims against the Director Defendants.  Specifically, the Court held that plaintiffs pled particularized facts showing that the Board utterly failed to implement any reporting or information system or controls with respect to airplane safety, and that a majority of the Director Defendants faced a substantial likelihood of liability under that theory.

First, plaintiffs adequately alleged the Board did not have a committee charged with direct responsibility for monitoring airplane safety.  Although the Audit Committee was charged with “risk oversight,” its oversight function was primarily focused on monitoring Boeing’s financial risks, and it never assessed the safety risks of the 737 MAX.

Second, plaintiffs adequately alleged that the Board did not monitor, discuss, or address airplane safety on a regular basis.  For example, plaintiffs alleged that the Board’s first call after the Lion Air Crash was explicitly optional, the Board focused on continued production of the 737 MAX rather than safety when it finally discussed the crash a month later, and the Board did not consider the 737 MAX’s safety until April 2019, after the Ethiopian Airlines Crash and after the Federal Aviation Administration grounded the 737 MAX fleet. 

Third, plaintiffs adequately alleged that the Board had no regular process or protocols requiring management to apprise the Board of airplane safety. The Board merely received ad hoc management reports that were “one-sided at best and false at worst,” conveying only favorable or strategic information.  The Court observed that, when safety was mentioned to the Board, the directors did not press for further information.

Fourth, plaintiffs adequately alleged that, although management saw red, or at least yellow, flags, that information never reached the Board, which further demonstrated that the Board failed to establish a reporting system. 

Fifth, plaintiffs adequately alleged facts that supported a reasonable inference that the directors knew that the Board should have had structures in place to receive and consider safety information, but failed to do so. 

The Court went on to determine that, even if it could be found that the Board had an adequate reporting system in place, for all the reasons discussed above, plaintiffs’ allegations demonstrated that the Board “ignored the Lion Air Crash and the consequent revelations about the unsafe 737 MAX.” 

The Court granted the motion to dismiss as to one claim against the Director Defendants relating to the Board’s decision to allow Boeing’s Chief Executive Officer to retire with compensation, notwithstanding his involvement in the alleged misinformation provided by management to the Board regarding safety issues.  Specifically, the Court held that plaintiffs did not plead particularized facts demonstrating that the Director Defendants faced a substantial likelihood of liability with respect to their decision regarding the CEO’s retirement and compensation.

Finally, the Court granted the motion to dismiss all claims against the Officer Defendants under Rule 23.1, reasoning that plaintiffs did not plead with particularity that demand on the Board was futile with respect to claims against the Officer Defendants or that any of the Director Defendants were beholden to or dominated by Boeing’s officers such that the Board would be unable to assess such claims. 

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