A derivative litigation case has been initiated against The Boeing Company following two fatal crashes of the 737 MAX airplane in 2018 and 2019, leading to extensive investigations into the incidents and corporate governance failures. The crashes, attributed to design flaws and inadequate pilot training regarding a software program, resulted in significant financial losses for Boeing and its shareholders. Stockholders allege that Boeing's directors and officers neglected their oversight responsibilities regarding airplane safety, thus harming the company and diminishing shareholder value. The court is tasked with determining whether the shareholders have sufficiently demonstrated that a majority of the board members face a substantial risk of liability for these oversight failures. The court found that the stockholders adequately pled that the board may be liable due to the absence of a reporting system for safety issues and ignoring clear warning signs. Consequently, the stockholders can pursue the Company’s oversight claim against the board. However, they failed to demonstrate that the board is incapable of asserting a claim against Boeing's officers. Additionally, a claim regarding the board's handling of the CEO's retirement and compensation was dismissed. Co-Lead Plaintiffs include the New York State Common Retirement Fund and the Colorado Fire and Police Pension Association, holding significant shares in Boeing.
Boeing, a major aerospace corporation, operates in four segments, with its Commercial Airplanes segment being the most profitable, contributing approximately 61.7% of revenue in 2017 and 45% in 2019. This revenue decline followed two fatal crashes of the 737 MAX aircraft in 2018 and 2019, resulting in significant loss of life, grounding of the aircraft, and substantial financial and reputational damage to the company. Plaintiffs are seeking to hold current and former Boeing officers and Board members accountable for failing to ensure airplane safety, referencing principles from key legal cases. The Officer Defendants include long-tenured executives such as McNerney, Muilenburg, Luttig, Conner, McAllister, Hyslop, and Sands, each with extensive backgrounds at Boeing. The Board, comprising individuals like Muilenburg, Calhoun, and Duberstein, features members with significant insider status and political connections. Key changes in leadership occurred post-crashes, particularly with Calhoun, who became Board Chairman and CEO in 2019 and 2020, respectively, following Muilenburg's removal and retirement. The document highlights the critical roles played by these individuals in overseeing Boeing's operations and safety protocols.
Defendant Greg Smith has been Boeing’s CFO since 2011, during which he and other Defendants are accused of neglecting their responsibilities to ensure the safety and airworthiness of Boeing’s aircraft, prioritizing rapid production and profit over safety. This shift in focus led to significant financial losses for Boeing, including millions in fees, fines, and lost revenue, yet several Defendants received substantial compensation packages. Historically, Boeing was known for its engineering-centric culture, but this changed after acquiring McDonnell Douglas in 1997, which emphasized profit over quality control. The resulting corporate culture led to discontent among engineers, culminating in a 40-day strike in 2000. The relocation of Boeing's headquarters to Chicago in 2001 further distanced the company from its engineering roots. This cost-cutting approach resulted in increased safety violations from the FAA, with 20 violations flagged between 2000 and 2020, leading to fines and criticism of leadership. Following management scandals that resulted in the dismissal of two CEOs, McNerney, a non-engineer, became CEO in 2005. Under his tenure, Boeing's safety record deteriorated, highlighted by incidents such as the grounding of the 787 Dreamliner due to battery fires in 2013 and subsequent NTSB directives for improved safety assessment processes in 2014 due to misleading claims.
Boeing's certification engineers failed to adequately test the lithium-ion battery system, and their safety assessment was deemed insufficient. An Al Jazeera investigative report highlighted poor quality control at a Dreamliner manufacturing plant, leading to foreign object debris left in aircraft, prompting a customer to reject Dreamliners from that facility due to these quality concerns. Additionally, in July 2013, a Boeing 777 crash resulted in three deaths and many injuries, with an NTSB report attributing the crash partially to inadequate documentation and training, recommending improvements. Boeing's safety issues persisted into 2015, with thirteen pending or potential civil enforcement cases related to quality control and safety violations. The FAA investigated these issues and Boeing's inadequate corrective actions. In December 2015, Boeing reached a historic settlement with the FAA, agreeing to pay $12 million in fines and up to an additional $24 million contingent upon implementing significant systemic initiatives over five years to enhance regulatory compliance. In February 2021, the FAA imposed an additional $6.6 million in penalties on Boeing.
Boeing lacked a formal board-level oversight process for airplane safety, with no board committees specifically assigned to this responsibility. Former director John H. Briggs noted the board's lack of tools for safety oversight, contrasting with other aviation companies that prioritize safety. From 2011 to August 2019, Boeing had five standing committees, with the Audit Committee serving as the main entity for risk and compliance, but it did not specifically address airplane safety. While the Audit Committee was responsible for overall risk management and compliance, it failed to report on airplane safety, as demonstrated by discussions in 2014 and 2017 that did not mention safety concerns. Throughout the development and grounding of the 737 MAX, the Audit Committee also did not address safety issues.
The Audit Committee of Boeing primarily prioritized financial risks associated with the 737 MAX's production over product safety during its oversight activities. Its audit plans, such as the February 2011 plan, focused on production readiness and supplier management, assessing the company's liquidity and resources for aggressive production. Even after the Lion Air Crash in 2018, safety was not identified as a compliance risk in updates to the Audit Committee. The Enterprise Risk Visibility (ERV) process, which provided an annual overview of Boeing's key risks, did not specifically emphasize airplane safety but rather concentrated on production and financial concerns. Discussions on airplane safety were absent from Board meetings, which occasionally addressed production line safety but often omitted safety topics entirely. Management communications to the Board primarily highlighted the business implications of safety crises, lacking substantive safety information. Boeing's internal safety reporting, managed by the Safety Review Board (SRB), did not report to the Board and was handled by mid-level management, preventing safety issues from reaching Board attention. Consequently, the lack of a Board-level reporting mechanism meant that whistleblower complaints regarding product safety were not reviewed by the Audit Committee or any other Board committee. Despite recent safety incidents, Boeing continued to prioritize the production of the 737 MAX, a key revenue source, amid competitive pressures from Airbus.
Boeing faced production and sales pressures as clients considered Airbus’s fuel-efficient jets, prompting a strategic decision regarding the 737 Next Generation (737 NG). In 2010-2011, Boeing evaluated two options: developing a new airplane over a decade or redesigning the 737 NG with larger, more efficient engines within six years. Opting for the latter to regain competitive advantage, Boeing planned a derivative aircraft, requiring only FAA certification for the changes made. During a June 2011 Board meeting, Jim Albaugh highlighted the benefits of a re-engineered 737 NG, including improved fuel efficiency and reduced costs. The Board approved the development of the 737 MAX in August 2011, which aimed to enhance customer value, maintain market share against the Airbus A320neo, and mitigate risks.
As part of the 737 MAX development, Boeing prioritized quick regulatory approval and minimized pilot training costs, which led to a rushed program characterized by substandard technical documentation. Engineers were instructed to maintain design commonality with 737 NG, which created challenges due to the larger engine's new placement affecting the aircraft's center of gravity. This resulted in a tendency for the aircraft to pitch upwards. Initial aerodynamic fixes were unsuccessful, leading to the implementation of the Maneuvering Characteristics Augmentation System (MCAS) to counteract the pitch-up tendency. Originally, MCAS was designed to activate only under specific conditions, but during flight testing in 2016, it was modified to operate at lower speeds, allowing it to trigger from a high angle of attack.
The AOA (Angle of Attack) sensor for the 737 MAX was severely susceptible to errors, influenced by factors like weather, software issues, and wildlife. Between 2004 and 2019, over 216 incident reports regarding failed AOA sensors were submitted to the FAA, some resulting in emergency landings. The design flaw of relying on a single AOA sensor created a critical point of failure, contrary to engineering principles advocating for redundancy. When activated, even incorrectly, this singular sensor would cause the MCAS (Maneuvering Characteristics Augmentation System) to push the aircraft's nose down. A proposal in 2013 to incorporate a safety feature from the Dreamliner, synthetic airspeed, to mitigate false AOA signals was rejected by management due to cost and training concerns, leaving MCAS reliant on the vulnerable sensor.
Boeing's internal and FAA assessments underestimated the risks associated with MCAS. A 2014 System Safety Assessment failed to account for the potential of repeated MCAS activations, misclassifying it as a non-critical system. Subsequent safety analyses indicated that a pilot’s delayed response to MCAS activation could lead to catastrophic outcomes, yet these analyses inaccurately assumed a four-second reaction time, which was later proven to be a significant underestimation. Boeing did not revise its 2014 assessment after modifying MCAS to depend solely on the AOA sensor, and internal communications revealed that Boeing's technical pilots misled the FAA regarding the operational conditions of MCAS.
Boeing sought expedited certification for the 737 MAX, aiming for Level B pilot training to avoid costly simulator training, which they argued was unnecessary due to commonalities with the 737 NG. Between 2014 and 2017, Boeing emphasized that simulator training was not required, leveraging its influence over the FAA, which often allowed self-regulation. Pressure from Boeing leadership was placed on Chief Technical Pilot Mark Forkner to secure Level B training. In August 2016, the FAA provisionally established Level B training requirements, and in November, following MCAS revisions, Forkner remarked about MCAS's erratic behavior in simulators and indicated to the FAA to omit MCAS references from their reports, asserting it was outside normal operations. In July 2017, the FAA finalized its report endorsing Level B training for the 737 MAX.
Boeing failed to submit a revised safety Assessment for the MCAS system and misrepresented its safety risks, leading the FAA to remove all MCAS-related information from a July 2017 report. An internal email revealed a Boeing employee boasting about manipulating the FAA's perception. Consequently, crucial information about MCAS was absent from the 737 MAX manuals and training materials for U.S. pilots. Following the Lion Air and Ethiopian Airlines crashes, FAA officials acknowledged that MCAS should have been included in these documents. Despite securing Level B training certification, Boeing continued to hide issues related to the 737 MAX, including the malfunctioning AOA disagree alert, which was not operational in at least 80% of the delivered planes. This alert was supposed to be a standard safety feature but became an optional add-on for an additional cost. Boeing did not inform the FAA or customers about the inoperable alerts until after the Lion Air crash, and continued to downplay the alert's significance after the Ethiopian Airlines crash.
Additionally, Boeing's aggressive marketing strategy for the 737 MAX led to over 4,300 orders by late 2016, particularly from airlines in emerging markets where pilot training quality was inconsistent. Despite requests for simulator training by airlines like Lion Air, Boeing insisted on computer-based training only, neglecting to provide the required simulator training.
Boeing began fulfilling orders for the 737 MAX in May 2017, resulting in substantial profits by 2018, with the Boeing Commercial Airplanes (BCA) division contributing approximately 60% of the company’s $101.1 billion annual revenue and 80% of its net earnings. By the end of 2018, Boeing's backlog of orders reached $490 billion, predominantly from the BCA and including nearly 5,900 jetliners, over 4,000 of which were 737 MAX airplanes. Despite this success, Boeing struggled to meet production and delivery targets, averaging only thirty-nine deliveries per month against a target of fifty-seven, leading employees to describe a "factory in chaos" under intense pressure.
Concerns about the safety of the 737 MAX emerged among employees. A general manager and engineer expressed apprehension about the aircraft's safety to senior management, highlighting a lack of prioritization regarding safety compared to production goals. Following the Lion Air crash, similar safety concerns were raised by other employees, citing relentless economic pressure to produce the aircraft quickly and cheaply. An engineering manager noted systemic issues stemming from senior leadership's lack of industry knowledge and unrealistic scheduling, suggesting that significant failures might be necessary to address underlying problems. Additionally, Boeing's Test and Evaluation department reported to executive leadership about safety margin erosion due to decreasing pilot experience, but this communication was misrepresented as merely a request for compensation rather than highlighting safety issues.
A Quality Assurance Inspector and Boeing veteran reported mistreatment for raising serious quality concerns, emphasizing that no one should suffer for attempting to uphold product quality. He noted his isolation in addressing these issues and mentioned another whistleblower, a former quality specialist, who faced harassment for similar complaints regarding the 737 MAX. While some complaints reached senior management, none were escalated to the Board, which remained unaware of whistleblower reports regarding safety, compliance, workforce exhaustion, and production pressures at the 737 MAX facility.
The document reveals that undisclosed issues with the 737 MAX contributed to the crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302, highlighting the Board's lack of safety oversight and reliance on sporadic updates from management. Following the October 29, 2018 crash of Lion Air Flight 610, which killed all 189 onboard, satellite data indicated problems with the plane's MCAS system. The black box data showed pilots searching for guidance on an issue that was not referenced in their materials.
In response to the crisis, Boeing began revising the MCAS software, and the FAA conducted a risk assessment, concluding that failure to address MCAS could lead to a fatal crash every two to three years. Subsequently, Boeing issued an Operations Manual Bulletin that failed to mention MCAS directly. The FAA followed with an Emergency Airworthiness Directive mandating immediate action to address unsafe conditions, which included revising flight manuals for the flight crew. Boeing's CEO expressed concerns about the potential impact of these mandates on productivity and delivery schedules. A Wall Street Journal article later indicated that Boeing may have withheld critical information regarding the 737 MAX.
Neither airline managers nor pilots were informed that the MCAS system had been integrated into the latest 737 variant, leaving them unprepared for associated risks. Pilots expressed frustration over inadequate training regarding the MCAS system. The FAA was also unaware that the new flight control systems were not included in training materials or discussions between carriers and regulators, and it was reported that Boeing intentionally concealed this information.
Management delayed informing the Board about the Lion Air Crash for over a week. Muilenburg first contacted the Board on November 5 with a brief email that did not mention the MCAS system, sensor redundancy issues, or specific pilot instructions. He updated the Board again between November 8 and 23 due to increasing negative publicity. On November 13, after receiving a news summary from Director Collins, Muilenburg, upon advice from Lead Directors, sent a memo to the Board claiming the WSJ article's assertions were false and blamed the Lion Air flight crew for the crash. He failed to disclose Boeing's knowledge of MCAS vulnerabilities or the lack of pilot training on it.
The following day, Muilenburg was advised to focus his communication solely on the Lion Air incident, while he and other executives discussed public reactions and negative press surrounding the crash. Muilenburg indicated he was managing various relations to counter unfavorable pilot comments and protect Boeing's interests. He characterized a Bloomberg article as misleading, asserting it suggested that Boeing had hidden the MCAS system from operators and failed to cover necessary procedures in training or manuals.
On November 18, following a New York Times article about the Lion Air crash, Boeing CEO Muilenburg communicated with the Board, expressing concern over ongoing media speculation regarding the crash and asserting the safety of the 737 MAX. He maintained this stance in messages to employees on November 19 and 20. Muilenburg then scheduled an "optional" Board call for November 23 to provide an update on the incident, marking the first Board meeting since the crash, although no minutes were recorded. Management's talking points for this call indicated that erroneous Angle of Attack (AOA) data contributed to the crash, and suggested that the Lion Air repair shop may not have adhered to approved procedures.
The talking points also included an explanation of the Maneuvering Characteristics Augmentation System (MCAS) and outlined updates to operators regarding AOA sensors. They mentioned a software update aimed at improving safety by limiting the aircraft's response to erroneous sensor data and reducing pilot workload. Muilenburg emphasized that any implication of Boeing withholding information was false and noted a meeting with the acting FAA Administrator, who deemed the 737 MAX safe.
In subsequent communications, Muilenburg attributed blame to Lion Air's crew and underscored that external statements denying Boeing's fault were being reflected in media coverage. He urged the public relations team to promote the 737 MAX's safety and reported to the Board on December 13 about discussions with Wall Street Journal editors regarding the media narrative.
The Board only formally addressed the Lion Air crash during scheduled meetings on December 16 and 17, focusing primarily on restoring profitability and efficiency rather than safety concerns regarding the 737 MAX.
The Board allocated a total of five minutes to discuss eight "Watch Items," including supply chain disruptions affecting MAX deliveries. Additionally, five minutes were spent on a four-page legal memo addressing the Lion Air incident, while ten minutes focused on Compliance Risk Management, which included a brief mention of the FAA Settlement but did not reference the 737 MAX's safety. The Lion Air incident was labeled a "Hot Topic" in the Executive Session, but the Audit Committee's updates lacked substantive information regarding the 737 MAX's safety. A December 17, 2018, Ethics and Compliance Update presented a chart of various inquiries but did not prioritize airplane safety. The agendas for 2019 Audit Committee meetings showed no planned discussions on safety matters. The Board's meetings on December 16 and 17, 2018, did not lead to any significant actions concerning airplane safety. On January 16, 2019, Muilenburg provided a brief update on the Lion Air crash investigation, emphasizing Boeing's support and the ongoing exploration of software enhancements for the 737 MAX, yet he quickly shifted focus to market confidence and financial performance rather than safety issues. His subsequent February 13, 2019, summary did not mention the Lion Air crash but reiterated Boeing's commitment to safety enhancements.
Boeing is actively engaging with media and stakeholders regarding its airplane production processes and personnel, specifically focusing on stabilizing the production line of the 737 and collaborating with key suppliers, particularly CFM engines, in anticipation of increasing production to 57 airplanes per month. The company aims to meet its quarterly delivery target of 206 planes, including a significant number of 737s, with ramp-up efforts concentrated in February and March, while also noting a recent peak in Boeing stock prices.
On February 20, Executive Vice President and General Counsel Michael Luttig briefed the Audit Committee on critical legal issues, including the Lion Air accident. During a Board meeting on February 24-25, members decided to postpone any internal investigation until after regulatory inquiries were concluded. By January 2019, the DOJ had initiated a criminal investigation into allegations that Boeing had misled the FAA during the 737 MAX certification process.
Boeing later disclosed text messages from former employee Forkner, which revealed he had lied to the FAA, although this information was withheld from the FAA until October 2019. The FAA sought explanations for Boeing's delayed disclosures. Ultimately, in a 2021 settlement with the DOJ, Boeing acknowledged it did not promptly inform the Fraud Section of its misconduct, resulting in a total financial penalty of $2.513 billion, which included fines and compensation to affected airlines and a fund for crash victims.
On March 10, shortly after the Board's decision to avoid an internal investigation, Ethiopian Airlines Flight ET 302, a 737 MAX, crashed, killing all 157 onboard. Although pilots attempted to follow emergency protocols provided by Boeing, they lost control due to the repeated activation of the Maneuvering Characteristics Augmentation System (MCAS). Following this incident, Boeing's leadership, including Muilenburg, began damage control efforts, but the Board did not evaluate the safety of Boeing’s aircraft.
Boeing issued a public statement on March 11 regarding the Ethiopian Airlines crash, asserting that if the pilot adhered to the flight manual, he could override flight control systems. At that time, one-third of the global 737 MAX fleet had been grounded, prompting calls from U.S. Senators for the FAA to ground the aircraft. Boeing's CEO, Muilenburg, communicated with the Board, emphasizing priorities of safety, quality, and stability, but did not propose specific actions to enhance the 737 MAX's safety or respond to concerns about the airplane's safety. Instead, he focused on ongoing operations and customer outreach, noting the FAA's recent reaffirmation of the 737 MAX's airworthiness and a forthcoming software enhancement.
Muilenburg also reviewed an internal employee communication, suggesting it lacked a strong assertion of confidence in the MAX's safety and insisted on clarity regarding the aircraft's safety and the involvement of the MCAS system. On March 12, he updated the Board, acknowledging further international grounding of the 737 MAX but attributing these decisions to public and political pressure rather than new findings. During this critical time, Boeing maintained discussions with the FAA, with Muilenburg also engaging with high-level government officials to advocate for the continued operation of the 737 MAX.
Ultimately, on March 13, following the FAA's investigation linking the Ethiopian Airlines crash to issues similar to those in the Lion Air crash, the FAA grounded the 737 MAX. The Board convened to discuss the crash and the possibility of grounding the fleet but did not take any immediate remedial actions until after the FAA's decision, which was made despite Boeing's objections.
Between November 2018 and March 2019, no Board minutes or agendas referenced discussions on grounding the 737 MAX, yet Boeing proactively took credit for the grounding. On March 13, CEO Muilenburg informed the Board that Boeing had successfully communicated its narrative on the grounding before the FAA's announcement. His monthly business update emphasized efforts to improve Boeing's public image, including a video filmed with Kevin McAllister on the production line. Muilenburg introduced safety metrics to the monthly report for the first time, highlighting production data alongside safety statistics like lost workday cases and near misses. His communications during this period centered on restoring Boeing’s reputation and returning the 737 MAX to service, reflecting a focus echoed by some Board members. For instance, Director Giambastiani directed attention to an article blaming pilots for the crashes, while Duberstein expressed concern over the negative publicity from a Southwest emergency landing.
On April 4, a preliminary report linked the MCAS system to the Ethiopian Airlines crash, prompting Boeing to issue a statement attributing accidents to a sequence of events. Subsequently, on March 15, Directors Collins and Calhoun suggested a Board meeting dedicated to product safety, advocating for a comprehensive review of quality metrics and safety protocols in light of the recent crashes and other incidents. This meeting aimed to reaffirm the Board’s commitment to safety and quality as paramount performance standards.
The communication strategy regarding management and quality assurance is emphasized to avoid misconceptions about the board's confidence in management or a belief in systemic quality issues. Collins highlighted the importance of prioritizing product quality and safety in board meetings, reflecting on practices from his time at Medtronic. This approach ensures that quality and safety are seen as paramount by both the board and senior management. Following Collins's suggestions, Muilenburg integrated safety data into board briefings and internal reviews.
During the April 28-29 board meeting, significant time was devoted to analyzing the Ethiopian Airlines crash, marking the first in-depth examination of the 737 MAX's MCAS system, FAA certification, and pilot training. The board initiated its first Board-level safety reporting and established the Committee on Airplane Policies and Processes (Airplane Committee). However, attendance at the Committee's fact-finding sessions was notably low, with Giambastiani often being the sole board member present.
From April to August 2019, the Airplane Committee reviewed several new safety-related topics not previously covered in board discussions. On May 6, the Committee formally sought details on the crash causes, with requests for information on pilot training and emergency protocols. By late June, Giambastiani suggested that product safety reports should be routed to the Audit Committee and shared with senior executives and the board.
The Audit Committee was tasked with monitoring high-risk issues, specifically requiring that a complete list of safety issues regarding the MAX be reported to key executives Dennis Muilenburg and Greg Hyslop. Subsequently, the Board established an Aerospace Safety Committee to enhance oversight of safety throughout the design, development, and certification processes of the company's aerospace products. This committee quickly recommended the creation of a Product and Services Safety Organization aimed at investigating undue pressure and safety concerns reported by employees, marking Boeing's first formal reporting mechanism for such issues to the Board. By October 20, product safety reporting processes were operational. During the December 15 Board meeting, the Audit Committee received a compliance risk management report that included a new category for safety, a notable change from previous reports.
Muilenburg emphasized the importance of understanding and assessing safety risks, advocating for improved visibility and communication regarding safety issues. By late 2019, he began receiving detailed weekly reports on potential safety concerns discussed by engineers, a shift from past practices. He later recognized that better information could have led to grounding the 737 MAX shortly after the Lion Air crash.
Despite these developments, the Board sought to maintain its public image by misrepresenting its oversight of the 737 MAX's safety. Lead Director Calhoun conducted interviews asserting that the Board had acted independently and promptly after the Lion Air crash, claiming it had evaluated safety risks and considered grounding the MAX but ultimately viewed the crash as an isolated incident not warranting such action.
Calhoun asserted that the Board of Boeing convened within twenty-four hours after the Ethiopian Airlines crash to discuss grounding the 737 MAX and recommended such action, which was later determined to be false. Despite criticism from the FAA, Calhoun publicly defended CEO Muilenburg, claiming he had acted appropriately until late 2019 when increased scrutiny led to Muilenburg's termination by the Board, which was publicly framed as a resignation to avoid disclosing the Board's prior support and oversight failures. This decision allowed Muilenburg to retain unvested equity awards valued at approximately $38.6 million. Calhoun became CEO in January 2020, distancing himself from Muilenburg's leadership and suggesting that Muilenburg prioritized profit over safety, while acknowledging the Board's complacency.
The 737 MAX fleet was grounded for twenty months due to safety issues, causing substantial damage to Boeing's reputation and financial standing. Boeing faced estimated non-litigation costs of $20 billion and litigation-related costs exceeding $2.5 billion, with ongoing legal challenges and order cancellations from customers. In January 2021, Boeing consented to a criminal charge of conspiracy to defraud the United States, resulting in significant penalties. The corporate fallout from the crashes and grounding led to multiple derivative actions, prompting the Court to consolidate these actions and appoint co-lead plaintiffs. The Verified Amended Consolidated Complaint was filed on January 29, 2021, addressing the Department of Justice's criminal penalties.
I asserts a derivative claim for breach of fiduciary duty against the Director Defendants, alleging three main failures: (1) prior to the Lion Air Crash, they did not establish a reasonable information and reporting system to monitor airplane safety; (2) after the Lion Air Crash, they ignored red flags regarding the operation and nondisclosure of the MCAS system, failing to investigate or rectify misconduct; and (3) following the Ethiopian Airlines Crash, they provided false assurances about the safety of the 737 MAX and decided to cash out Muilenburg’s unvested equity compensation. Count II targets the Officer Defendants for similar breaches, asserting they failed to implement or monitor a compliance and safety program, neglected to investigate red flags, and concealed significant safety risks.
Defendants filed a motion to dismiss based on Court of Chancery Rules 12(b)(6) and 23.1, arguing that the claims should be dismissed for failing to demonstrate that demand on the Board is futile. Plaintiffs contend that the breaches harmed Boeing and that the decision to pursue claims rests with the Board, which typically has the authority to manage corporate affairs. However, Delaware law allows for exceptions to this rule under certain circumstances. The court acknowledged the need for plaintiffs to demonstrate demand futility, referencing Delaware case law that affirms the Board's primary role in managing corporate actions.
Stockholders may initiate derivative lawsuits on behalf of a corporation to address issues of management misfeasance or inaction when those in control of the company either refuse to act or are incapable of doing so. To proceed with such a suit, stockholders must meet the demand requirements outlined in Court of Chancery Rule 23.1, which necessitate heightened factual specificity compared to standard notice pleadings under Chancery Rule 8(a). A stockholder must either demonstrate that a demand to the board of directors was made and rejected or provide justification for not making such a demand, citing futility. If a demand is bypassed, the stockholder must present specific facts that create reasonable doubt about the board's impartiality in considering the demand.
Delaware courts apply two primary tests for assessing demand futility: the Aronson test, relevant for claims involving contested transactions where directors' decisions may breach fiduciary duties, and the Rales test, which applies when the board's ability to impartially consider the demand is questioned. Demand is not automatically excused simply because directors may be sued; it must be shown that their conduct is egregious enough to challenge the business judgment standard, indicating a substantial likelihood of liability. Recent discussions suggest that the Aronson test may be increasingly scrutinized in light of subsequent legal developments.
Under the Aronson standard, a plaintiff must provide specific facts that create reasonable doubt about either the disinterest and independence of directors or the validity of a business judgment in a challenged transaction. The Blasband case applies when a majority of board members did not participate in the decision or when the action is not a business decision, such as oversight failures. The prevailing Rales standard focuses on whether the board can exercise business judgment regarding a demand. A director cannot act with objectivity if they are interested (facing substantial liability) or lack independence from another interested fiduciary. In assessing demand futility, the court evaluates whether the particularized allegations in a derivative complaint raise reasonable doubt about the board's ability to act independently.
For motions to dismiss under Rule 23.1, the court treats well-pled allegations as true and makes reasonable inferences in the plaintiff's favor, similar to Rule 12(b)(6), but with stricter requirements. Conclusory allegations unsupported by specifics are not accepted as true. The sufficiency of a Rule 23.1 complaint is case-dependent, and it does not override Rule 12(b)(6). Generally, a complaint that meets the standards of Rule 23.1 will also satisfy Rule 12(b)(6). Concerns about board oversight arise if a majority of board members are compromised due to potential liability regarding any claims.
A motion to dismiss under Court of Chancery Rule 12(b)(6) requires the court to accept all well-pleaded factual allegations as true, including vague allegations that provide notice of the claim. The court must draw reasonable inferences in favor of the non-moving party and may only dismiss if the plaintiff cannot recover under any conceivable set of circumstances. The standard to survive dismissal is minimal and favorable to the plaintiff, even if proving the claims later may be difficult. However, the court is not obligated to accept conclusory allegations devoid of specific facts or to draw unreasonable inferences.
In this case, the plaintiffs have adequately demonstrated that demand is futile for claims against the Director Defendants with one exception, but have not established demand futility for claims against the Officer Defendants. Specifically, the plaintiffs argue that from November 18, 2019, onward, a majority of the Board members have faced a significant likelihood of liability due to a lack of oversight regarding safety monitoring. Nine out of twelve board members allegedly failed to fulfill their oversight duties as outlined in the Caremark standard, which is a challenging legal theory for plaintiffs to win. The Delaware Supreme Court has reiterated that directors may only be held personally liable for failing to oversee corporate operations when such a failure is evident.
Directors are deemed to have failed their fiduciary duties if they neglect oversight responsibilities, particularly in the context of a derivative claim under the Caremark standard. Plaintiffs must present specific factual allegations demonstrating that directors either completely failed to implement any reporting system or, if such a system exists, consciously neglected to monitor it, thus failing to stay informed about risks. Delaware courts typically dismiss general claims linking misconduct to inadequate internal controls, requiring a clear connection between the board's actions and the corporate issues at hand. While Caremark does not demand absolute knowledge from directors, it requires good faith efforts to establish and monitor oversight systems. Bad faith or intentional neglect constitutes a necessary condition for director liability under this standard. A plaintiff must show that the directors acted with scienter, indicating a conscious disregard for their duties, which diminishes their ability to invoke defenses based on the presumption of good faith. The Caremark analysis aligns with the broader principles governing director conduct, particularly concerning the duty of care and the implications of exculpatory provisions.
A plaintiff can establish director liability for bad faith by demonstrating that directors either disregarded their obligation to stay informed about the business and its risks or failed to oversee the company effectively, with knowledge of their actions. In the case at hand, the motion has been partially denied regarding Count I, as plaintiffs have alleged sufficient particularized facts indicating a substantial likelihood of Caremark liability among a majority of the director defendants. The plaintiffs' Caremark theory segments the timeline of the Company’s 737 MAX incidents into three phases: prior to the first crash, between the two crashes, and following the second crash.
Before the Lion Air Crash, plaintiffs argue the Board neglected to implement necessary reporting or information systems. They assert that the first crash served as a warning that the Board ignored, which led to deficiencies that culminated in the Ethiopian Airlines Crash. Furthermore, after both incidents, the plaintiffs contend the directors breached their fiduciary duties by permitting Muilenburg to retire with unvested equity compensation.
To establish oversight liability under Caremark, a plaintiff must show that directors either knew they were neglecting their fiduciary responsibilities or consciously disregarded their duty to act. Directors are expected to make a good faith effort to implement reasonable monitoring and reporting systems to prevent wrongdoing that could harm the company. A significant failure to exercise oversight, such as neglecting to establish these systems, can result in liability for lack of good faith. The recent Supreme Court ruling in Marchand highlighted the necessity for rigorous board oversight, especially concerning critical regulatory compliance issues, illustrating the heightened scrutiny required for issues central to the company's operations.
The court in Marchand determined that the board failed to implement a reasonable monitoring and reporting system regarding food safety compliance, relying instead on management's discretion. This lack of oversight contributed to significant deficiencies, including the absence of a dedicated board committee for food safety, no regular processes for management to report on compliance, and no scheduled discussions on key food safety risks. Notably, before a listeria outbreak that resulted in customer fatalities, management had received concerning reports that were not disclosed to the board.
The court emphasized that food safety was essential to the company's operations and that similar rigorous oversight is required in other mission-critical areas, such as airplane safety for Boeing. The board's failure to actively oversee its compliance with safety regulations directly contradicts its fundamental duties, particularly in a regulated environment. This oversight failure allows for a reasonable inference of the board's substantial likelihood of liability. The court affirmed that the plaintiffs met their burden under Rule 23.1 regarding the board's oversight failures, highlighting that while Marchand's findings are not a prescriptive checklist, they illustrate the necessity for directors to exercise discretion tailored to their specific industry and operational context. Additionally, it was noted that the board lacked a committee responsible for monitoring airplane safety.
The Amended Complaint asserts that the Board lacked a dedicated committee to oversee airplane safety, with the Audit Committee primarily focused on financial risk oversight, not safety. The Audit Committee did not regularly discuss or evaluate airplane safety, particularly regarding the 737 MAX and its safety features before and after the Lion Air Crash. Although the Audit Committee occasionally addressed safety in a broad context, these instances do not indicate a specific charge to monitor airplane safety. Furthermore, other risk analysis processes and groups failed to address safety concerns, reinforcing the plaintiffs' claim that no committee was responsible for airplane safety oversight. The Board only established the Airplane Committee, explicitly responsible for safety oversight, in April 2019, which was after the crashes had occurred. The Board's overall monitoring of airplane safety was inadequate, with no regular meetings or discussions dedicated to this critical issue until after the second crash, further highlighted by the lack of an internal reporting system for safety concerns. The Board's first meeting regarding the Lion Air Crash was optional and did not prioritize discussions on safety-related topics until later meetings, focusing instead on profitability and efficiency.
The Audit Committee's discussions regarding the 737 MAX predominantly focused on supply chain, factory disruptions, and legal issues, neglecting safety concerns. In February 2019, the Board discussed factory recovery and production increases but did not address product safety or the MCAS system. The Board decided to postpone its investigation into safety concerns despite public reports, and even after the Ethiopian Airlines crash, safety was still not on the agenda. It was only after the FAA grounded the 737 MAX fleet in April 2019 that safety discussions were initiated.
Defendants claim that the Board regularly discussed safety as part of its strategic initiatives, citing slide decks and updates on the 737 MAX’s development and production. They argue that the Board's inspections and oversight during FAA certification processes demonstrate their commitment to safety. However, these safety references must be viewed within the context of the Board's primary focus on production timelines and revenue, rather than customer safety. The document asserts that the Board's minimal attention to safety, framed as regulatory compliance, does not meet the rigorous oversight standards established in the Marchand case. Compliance with FAA regulations does not necessarily indicate an effective system for monitoring safety at the Board level, suggesting that management's focus on production objectives did not adequately account for safety oversight.
The Board's oversight regarding airplane safety was severely lacking, characterized by an absence of regular processes or protocols requiring management to inform them about safety issues. Instead, the Board received only sporadic, management-initiated reports that primarily highlighted favorable business strategies rather than focusing on safety. The allegations indicate that the Board did not demand consistent safety reports, leading to a failure to properly assess safety risks. The reports they received during the development and FAA certification of the 737 MAX were high-level and did not include sufficient safety content.
Following the Lion Air Crash, it was evident that there was no established process for communication between management and the Board regarding safety. Communications from CEO Muilenburg were self-initiated and aimed at countering negative media coverage rather than addressing safety concerns. Muilenburg's first communication regarding the crash occurred a week later, indicating a reactive rather than proactive approach to safety oversight. Overall, the Board's reliance on discretionary management reports undermined their obligation to ensure compliance with safety regulations and fostered an environment where safety was not prioritized.
Muilenburg communicated to the Board that an airspeed indicator had been damaged but characterized the Lion Air crash primarily as a public relations issue, asserting the safety of the 737 MAX fleet. Following a Wall Street Journal article, he reiterated that safety was Boeing’s top priority while denying allegations of withholding information and reinforcing that existing flight crew procedures were sufficient. His assurances about the 737 MAX’s safety were based on questionable data, emphasizing a "rigorous test program" without addressing significant safety concerns, such as overworked employees.
In subsequent months, Muilenburg’s updates to the Board focused on Boeing’s public image and the crash's effect on production and delivery schedules, rather than on safety. Reports highlighted production goals and performance metrics but failed to address safety issues. Muilenburg consistently attributed blame for the accident to pilot and maintenance errors without prompting further inquiry from the Board regarding the crash's causes. Despite his leadership role, Muilenburg did not indicate any directives from the Board for thorough reporting or investigation into the crash. Instead, Boeing’s management took the lead while the Board remained passive, relying on management’s occasional safety updates. Following the Ethiopian Airlines crash, the Board continued to accept Muilenburg’s reassurances about safety and quality without demanding further information or clarification.
Boeing's Board of Directors lacked a formal protocol for receiving regular safety updates from management, which became evident following the Ethiopian Airline Crash in April 2019. Prior to this, it was the first time key management figures related to engineering and safety presented to the Board, indicating a significant gap in oversight. Management's ad hoc reports were limited to favorable assessments that did not accurately reflect safety issues, particularly concerning the MCAS and AOA sensor, which were implicated in crashes. The reports conveyed an optimistic view of the 737 MAX's safety and production capabilities without addressing critical vulnerabilities. Furthermore, Boeing's CEO Muilenburg provided assurances about the aircraft's safety and ongoing software enhancements while downplaying the urgency of these updates. The Board's reliance on management's selective reporting and lack of established mechanisms to monitor safety contributed to a failure in understanding the true risks associated with Boeing's aircraft. Overall, the Board's oversight was inadequate, as it did not demand comprehensive and honest safety reports from management.
Management at Boeing was aware of significant safety issues with the 737 MAX but failed to communicate these concerns to the Board, indicating a lack of an effective reporting system. Prior to the Lion Air Crash, management received formal employee complaints and conducted internal safety analyses that highlighted critical vulnerabilities in the MCAS system. Despite this knowledge, there is no evidence that management informed the Board of the potential for catastrophic failure or the malfunctions of key sensors. Following the crash, Boeing revised the MCAS system and acknowledged high risks, yet continued to assure the Board of the aircraft's safety without disclosing the associated risks.
The case draws parallels with the Marchand ruling, where the Delaware Supreme Court found that the absence of a safety-focused board committee and regular reporting protocols implied a breach of fiduciary duties by directors, suggesting scienter. The allegations against Boeing's directors are further supported by their own admissions, particularly an email from Collins advocating for dedicated discussions on quality and safety, indicating an awareness of the Board’s inadequate oversight mechanisms. This context reinforces the inference of directors' wrongdoing and their knowledge of their oversight failures.
The excerpt highlights the governance failures of Boeing's Board of Directors, particularly regarding safety oversight. It emphasizes that during board meetings, product quality and safety were prioritized over financial matters, demonstrating a commitment to safety that was allegedly not reflected in actual practices. Following the Lion Air Crash, Calhoun is accused of misleadingly claiming that the Board acted swiftly and responsibly regarding safety concerns, despite evidence suggesting otherwise. This deception, characterized as a breach of fiduciary duty, forms the basis of Count I in the Amended Complaint.
The plaintiffs argue that the Board has a rigorous oversight obligation in safety-critical situations, and their failure to fulfill this responsibility led to significant reputational and financial harm. The allegations are supported by the Caremark decision, which outlines two prongs for establishing board liability. The first prong involves proving a failure to oversee critical risks, while the second prong asserts that the Board ignored clear signs of misconduct related to the 737 MAX's safety issues. The plaintiffs maintain that the Board's inaction on known safety risks, coupled with failures in establishing a proper reporting system, substantiates their claims. Overall, the plaintiffs assert that a majority of the Director Defendants face significant liability due to these breaches.
Caremark’s second prong is relevant when a company has an oversight system but the board fails to monitor it effectively. In the case referenced, the board is accused of consciously ignoring significant warning signs regarding the safety of the 737 MAX following the Lion Air Crash. The board did not seek timely information about the crash, which was widely reported, and only received updates from management over a week after the incident, accepting management's assurances about the safety of the aircraft without question. Despite having various reporting systems and controls in place, the board failed to act on red flags related to the MCAS system and did not investigate these concerns until well after they were raised publicly. Their first formal discussion of the crash occurred in a regularly scheduled meeting in December 2018, focusing on production rather than safety. Ultimately, the board decided to delay any internal investigation until after regulatory inquiries were completed. This failure to monitor and respond to known issues suggests a lax approach to compliance and oversight.
The Board of Directors is criticized for perceiving the crashes of the 737 MAX as isolated incidents and public relations concerns rather than as serious safety issues, failing to properly investigate the aircraft's safety and the certification process. Despite having information that raised safety concerns, the Board did not take action, indicating a lack of due diligence rather than a simple oversight. The plaintiffs argue that the Board's inadequate response to the Lion Air crash demonstrates a failure to address significant safety risks.
Additionally, the plaintiffs allege that the Director Defendants breached their fiduciary duties by allowing former CEO Muilenburg to receive unvested equity compensation upon his retirement, despite his misleading actions regarding the FAA and his inadequate responses to the crashes. This claim is framed as either waste or bad faith. However, the plaintiffs have not provided sufficient particularized facts to show that the Director Defendants face a substantial likelihood of liability in this matter. They have not effectively challenged the independence of the Board concerning Muilenburg's departure and have suggested that the Board may have protected him to avoid scrutiny of their own failures. The plaintiffs assert that the Board’s lack of safety oversight motivated them to maintain a favorable relationship with Muilenburg amidst significant public backlash regarding the accidents and subsequent financial repercussions for Boeing.
Plaintiffs have not provided specific facts to support their claim that Muilenburg's compensation was intended to silence him regarding his Board interactions. The evidence from the Section 220 production does not reasonably suggest that Muilenburg aimed to retaliate against the Board. The allegations of waste or bad faith against the Board lack the required particularity and fail to meet the high standard needed to establish such claims. A waste claim necessitates demonstrating that a board decision was egregious or irrational, and the presumption of good faith must be overcome. To justify a waste claim without making a demand, plaintiffs must allege facts indicating a decision that was excessively one-sided. Similarly, proving bad faith requires clear evidence of improper intent or a decision devoid of any rational basis. The Amended Complaint and Section 220 records indicate that the Board's decision to allow Muilenburg to retire with compensation was a valid exercise of business judgment, particularly given the significant challenges Boeing was facing at that time. Even if the Board's choice was to minimize public criticism and financial damage, it aligns with a legitimate business objective. Therefore, the plaintiffs failed to allege the necessary facts to substantiate their claims regarding Muilenburg's compensation, leading to the granting of the Motion to dismiss these claims and the claims against the Officer Defendants under Rules 23.1 and 12(b)(6).
Defendants contend that Plaintiffs fail to adequately plead facts justifying the excusal of demand for Count II, which alleges breach of fiduciary duty by Boeing’s officers. Citing case law, Defendants argue that the Board acted within its rights by opting to settle with the former CEO instead of terminating him for cause, which could have led to a detrimental legal dispute. They assert that other considerations, such as maintaining a smooth leadership transition and avoiding future legal complications, properly influence the Board’s decisions. Additionally, Defendants claim Delaware law does not support Caremark claims against officers and that Plaintiffs have not demonstrated any breach of the duty of care by the Officer Defendants. Plaintiffs did not respond to the demand futility arguments regarding Count II, relying instead on the assumption that Officer Defendants could be subject to Caremark liability, thus rendering demand futile for all Defendants. However, Plaintiffs have not pled this theory with the required specificity nor shown that any Director Defendants are dominated by the Officer Defendants to the extent that they would be unable to evaluate Count II. The allegations in the Amended Complaint regarding demand futility do not address the Officer Defendants, focusing instead on the likelihood of liability of a majority of the Board members for failing to implement a monitoring system. Consequently, Count II is dismissed under Rule 23.1, and the court does not need to consider Defendants’ Rule 12(b)(6) arguments. The court's motion is partially granted and partially denied, with an order to follow within twenty days.
