In re Boeing Co. Derivative Litigation

In October 2018, a 737 MAX airplane manufactured by The Boeing Company (defendant) crashed near Indonesia. In March 2019, another Boeing 737 MAX crashed near Ethiopia. The crashes were caused by an undisclosed engineering defect and software issue. As of 2020, Boeing incurred approximately $22.5 billion in costs due to the crashes and faced billions more in criminal penalties. Without making a litigation demand on Boeing’s board, Boeing shareholders (plaintiffs) initiated a shareholder-derivative suit against nine of Boeing’s 12 directors (defendants), alleging that the directors breached their duties of loyalty by failing to oversee and monitor the 737 MAX’s safety. Citing the lack of a demand, the directors moved to dismiss. The shareholders responded that demand was excused because the directors faced a substantial likelihood of liability on their claims under In re Caremark International Inc. Derivative Litigation. Per Caremark, directors acted disloyally if (1) they utterly failed to implement any reporting or information system or controls or (2) having implemented such a system or controls, they consciously failed to monitor or oversee the system’s operations. Regarding the first prong, the shareholders alleged that before the 2018 crash, (1) no board committee was directly responsible for monitoring airplane safety; (2) the board did not regularly monitor, address, or discuss airplane safety; and (3) the board had no regular process requiring management to inform it about airplane-safety concerns. Regarding the second prong, the shareholders further alleged that the 2018 crash was a safety red flag that the directors ignored. Specifically, the shareholders alleged that the directors did not (1) promptly seek information about the 2018 crash, even after a newspaper blamed serious engineering defects that Boeing purportedly hid; (2) challenge management’s denial of the newspaper’s claims; or (3) convene a mandatory board discussion of the October crash until December and even then did not focus on safety. In addition, in February 2019, the board delayed any internal crash investigation.