In re Boeing Co. Derivative Litigation

Court of Chancery of the State of Delaware · 2021 · Corporations

CorporationsDerivative litigationDemand futilityBoard oversightCaremarkCaremarkRalesMarchand

Facts

Boeing's 737 MAX crashed twice, in October 2018 and March 2019, and investigations revealed serious safety problems involving MCAS, a single faulty AOA sensor, and inadequate disclosure and training. Plaintiffs alleged Boeing's board had no committee specifically charged with airplane safety, no regular board-level process for receiving safety reports, no regular schedule for discussing airplane safety, and no board-level mechanism for receiving internal safety complaints before April 2019. After the first crash, management gave the board sporadic, management-initiated updates that stressed the plane was safe and focused on production, reputation, and business impacts, while the board did not meaningfully investigate or address safety. After the second crash and grounding, the board finally created safety-focused committees and reporting structures.

Issue

Whether plaintiffs pled with particularity that a majority of Boeing's directors faced a substantial likelihood of liability for oversight failures, such that pre-suit demand on the board was excused. The court also considered whether demand was excused as to claims against Boeing's officers and whether the board's treatment of the CEO's retirement and compensation supported a derivative claim.

Rule

Under Rales, demand is futile if the complaint pleads particularized facts creating a reasonable doubt that the board could properly exercise independent and disinterested business judgment in responding to a demand, including because a majority faces a substantial likelihood of liability. Under Caremark, oversight liability may arise if directors either utterly fail to implement any reporting or information system or controls, or, having implemented such a system, consciously fail to monitor or oversee it by ignoring red flags. Where a company operates in the shadow of essential and mission-critical regulatory compliance risk, the board must make a good-faith effort to put in place a reasonable board-level system of monitoring and reporting.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Biologics, a Delaware corporation based in San Diego, manufactures injectable cancer drugs. Product sterility is heavily regulated and central to the company’s business, but the board has no committee charged with drug safety, no regular board agenda item on sterility compliance, and no formal protocol requiring management to report contamination events to the board.

In a derivative suit after a contamination shutdown causes major losses, are stockholders most likely to plead demand futility as to the directors?

Explanation. Under Rales, demand is excused if a majority of the board faces a substantial likelihood of liability. Under Caremark prong one, that can be shown where directors utterly fail to implement any reporting or information system. The majority opinion emphasized that for mission-critical, heavily regulated safety risks, the board must make a good-faith effort to establish a reasonable board-level system of monitoring and reporting. Here, the absence of a safety committee, regular agenda, and reporting protocol supports that inference.