Delaware Court Of Chancery Upholds Alleged Safety-Related Caremark Claims Against Airplane Manufacturer’s Board
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  • Delaware Court Of Chancery Upholds Alleged Safety-Related Caremark Claims Against Airplane Manufacturer’s Board

    On September 7, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery largely denied a motion to dismiss a stockholder derivate suit against the directors of The Boeing Company (the “Company”) in the wake of two fatal crashes of an airplane it manufactured.  In re The Boeing Co. Derivative Litigation, No. 2019-0907-MTZ (Del. Ch. Sept. 7, 2021).  Plaintiffs alleged that the board breached its fiduciary duty of oversight under Caremark by failing to ensure adequate safety and quality control.  The Court found that plaintiffs sufficiently pleaded that the board failed to establish board-level reporting systems related to “mission critical” airplane safety and did not adequately respond to red flags, including media reports about the crashes.  Accordingly, the Court held that the complaint demonstrated that the directors faced a substantial likelihood of liability and that pre-suit demand on the board was excused.

    The derivative claims arose from two fatal crashes of a new model of the Company’s airplane allegedly attributable to a defect in one of its systems and the “attendant financial and reputational harm” to the Company.  Plaintiffs alleged that the board failed to create any oversight systems related to airplane safety, relying solely on ad hoc safety reports from management and the audit committee’s broad mandate to monitor financial risk.

    To satisfy the duty of loyalty under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), “directors must make a good faith effort to implement an oversight system and then monitor it.”  Noting that Caremark claims are “possibly the most difficult” to assert against a board, the Court highlighted that, under Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), a board must “rigorously exercise its oversight function with respect to mission critical aspects of the company’s business, such as the safety of its products that are widely distributed and used by consumers.”

    The Court pointed to several allegations that supported the inference that the directors “utterly failed” to implement a reporting system:  For example, the board allegedly had no committee charged with direct responsibility for monitoring airplane safety.  The Court noted that this purported deficiency was “compounded” by the alleged absence of an internal reporting system for whistleblowers to bring safety concerns to the board.  Likewise, the complaint alleged facts supporting the conclusion that the board—as a whole—did not formally address safety monitoring or have regular assessments of safety risks.  Moreover, the complaint alleged that the board had no regular process or protocols requiring management to apprise the directors of airplane safety-related issues.  In this regard, the Court explained that “[f]or mission-critical safety, discretionary management reports that mention safety as part of the Company’s overall operations are insufficient to support the inference that the Board expected and received regular reports on product safety.”

    The Court further found that the allegation that management saw red and yellow flags—specifically, that the airplane had “numerous safety defects”—that never reached the board also supported the inference of inadequate monitoring.  The Court added that the complaint supported an explicit finding of scienter as well because there were alleged board emails showing that certain directors “knew the Board should have had structures in place to receive and consider safety information.”