The board of directors (“Board”) of The Boeing Company (“Boeing”) agreed to a staggering $237.5 million settlement of a lawsuit brought by stockholders on behalf of Boeing alleging that the Board and certain executive officers breached their fiduciary duties of oversight and monitoring of mission-critical airplane safety and airworthiness of the 737 MAX prior to the initial and second fatal crashes.  Prior to the settlement, the Delaware Court of Chancery (“Court”) issued a Memorandum Opinion concluding that the stockholders had successfully alleged that a majority of the Company’s directors faced a substantial likelihood of liability for Boeing’s losses attributable to the crashes. The Court referenced the plaintiffs’ allegations that the Board had a misplaced focus on rapid production and profit maximization over engineering and safety, the Board had failed “to establish a reporting system for airplane safety” and turned “a blind eye to a red flag representing airplane safety problems.”  In a stinging rebuke, the Court stated that “The Board publicly lied about if and how it monitored the 737 MAX’s safety.”  Although we have no way of knowing, the Court’s statements on the Board’s actions in the Memorandum Opinion may have served as an incentive to Boeing agreeing to settle the litigation.

Background

A 737 MAX (“MAX”) manufactured by Boeing departed from Jakarta and crashed into the Java Sea shortly after takeoff, killing all 189 passengers and crew. It was the first major accident involving the new 737 MAX.  Less than six months later, another 737 Max crashed soon after takeoff from Addis Ababa, killing all 157 aboard.

Preliminary investigations revealed flight control problems tied to a design flaw involving the Maneuvering Characteristics Augmentation System (“MCAS”) of the MAX series. As a result of this investigation, the United States Federal Aviation Administration (“FAA”), along with aviation authorities worldwide grounded all MAX aircraft in service across the globe.

Boeing stockholders lost billions of market value due to the grounding of the MAX, resulting in a derivative suit being filed by the stockholders against the Board and certain executive officers for breach of their fiduciary duties by failing to monitor and oversee airplane safety both before and after the 737 MAX crashes.

Analysis

Defendants moved to dismiss the plaintiffs’ claims, alleging, among other things, that the plaintiffs had failed to satisfy the pleading requirements of Caremark[1], which require plaintiffs to plead that defendants face a substantial likelihood of liability because they either (1) “utterly failed to implement any reporting or information systems 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 attention.”  Of note, the Court stated that Caremark does not insulate directors who did not make a “a good faith effort to implement an oversight system and then monitor it.”

The Court found that airplane safety is “essential and mission critical” to Boeing’s business and Board oversight is therefore required to be rigorous.  The Court then noted the following allegations of the plaintiffs:

• After the Lion Air Crash, despite being made aware of red flags concerning operation, development and nondisclosure of MCAS, the Board consciously disregarded their duty to investigate and remedy misconduct;
• The Board had no committee charged with direct responsibility to monitor airplane safety;
• No internal reporting system by which whistleblowers could bring safety concerns to the Board existed; and
• The Board did not regularly allocate meeting time to airplane safety and quality control until after the second crash.

Based on these and other allegations, the Court found that the plaintiffs alleged facts sufficient to satisfy the Caremark standards at the pleadings stage and allowed the lawsuit to proceed.

Key Takeaways

The Boeing case illustrates the importance of a board taking the time to understand and outline a company’s essential and mission critical oversight and monitoring standards and goals as part of satisfying their duty of loyalty. The case demonstrates that goals of pure profitability and cost cutting will not satisfy a director’s duty of loyalty where oversight and monitoring policies and procedures are not satisfied.  Once established, boards should be actively involved with monitoring, overseeing and taking part in ensuring that the company achieves its standards and goals.

[1] In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).

[View source.]