Blog: Another Caremark case survives a challenge
Summary
In December, the audit committee received a compliance risk management report that, for the first time, included a category for “Safety.” Eventually, the CEO “acknowledged that access to better information would have supported grounding the 737 MAX fleet shortly after the Lion Air Crash.” The Court also asserted that the “Board publicly lied about if and how it monitored the 737 MAX’s safety,” with the lead director making “false” representations in newspaper interviews designed to “‘[p]osition the Boeing Board of Directors as an independent body that has exercised appropriate oversight.’” After the CEO came under fire from the FAA, he was terminated, although allowed to retain over $38 million in unvested equity awards. In January 2021, “Boeing consented to the filing of a criminal information charging the Company with conspiracy to defraud the United States and thereby incurring billions of dollars in penalties.” The plaintiffs filed a derivative action against the board claiming conscious breach of fiduciary duty and violation of corporate responsibilities by “(1) before the Lion Air Crash, failing to implement any reasonable information and reporting system to monitor and oversee the safety of Boeing’s airplanes; (2) after the Lion Air Crash, despite being made aware of red flags concerning the operation, development, and nondisclosure of MCAS, consciously disregarding their duty to investigate and to remedy any misconduct uncovered; and (3) after the Ethiopian Airlines Crash, falsely assuring the public about the safety of the 737 MAX and MCAS and deciding to cash out [the CEO’s] unvested equity-based compensation.” The complaint also included a derivative claim for breach of fiduciary duty against certain officers. The plaintiffs alleged that demand on the board was futile because a majority of the board “faced a substantial likelihood of liability for failing to make any good faith effort to implement and oversee a board-level system to monitor and report on safety,” that is, “failure to fulfill their oversight duties under the standards set forth in Caremark, as applied by the Delaware Supreme Court in Marchand.” The Court concluded that, as to the directors, the allegations were sufficient to render demand futile (except for the claim related to CEO compensation), but not adequate as to the officers. The Court held that the plaintiffs did not “meaningfully challenge the independence and disinterestedness” of the board in connection with the terms of the CEO’s departure or adequately plead waste or bad faith. But, as Boeing shows, a board can make that claim much easier to establish if it leaves risk oversight to the discretion of management and fails to raise questions in the face of red flags.