Recent Delaware Decision Highlights Increased Board Oversight Requirements In Caremark Business | Holland & Knight LLP


On September 7, 2021, the Delaware Court of Chancellery cleared a derivative shareholder lawsuit against The Boeing Company (Boeing), alleging that Boeing’s board of directors had breached its fiduciary duties by failing to implement appropriate monitoring and surveillance procedures on “mission criticisms”. “The risks to aircraft safety. In Regarding the Boeing Company Derivatives Litigation (hereafter, In re Boeing),1 Vice-Chancellor Morgan T. Zurn has dismissed a motion to dismiss seeking the dismissal of shareholder claims against members of Boeing’s management and board of directors in connection with two fatal crashes involving the 737 MAX model aircraft. The two crashes – one in 2018 and the other in 2019 – severely damaged the company’s reputation, resulting in the 737 MAX being brought to a standstill, billions of dollars in aircraft orders being canceled and billions of dollars in aircraft orders being canceled. dollars in lost revenue, as well as significant litigation and non-litigation costs. In the 103-page decision, the court found that the plaintiffs had sufficiently alleged that the administrators had failed to put in place an aircraft safety reporting system and, “turning a blind eye to a red flag”, are exposed to a “substantial probability of liability for the losses of Boeing.”

The In re Boeing The case is the latest in a series of decisions in which failed supervisory claims against corporate directors (commonly referred to as “Caremark” claims after In re Caremark International Inc. Derivative litigation; below Maintenance mark 2 ) have survived a motion to dismiss. While Maintenance mark claims have been described as “perhaps the most difficult theory in corporate law on which a claimant can hope to obtain judgment”, these cases highlight the risk that traditional oversight mechanisms, not suited to specific risks , as well as excessive reliance on management reports on a ad hoc basis, may not be sufficient to achieve early rejection of Caremark claims. Therefore, boards and committees of the board should review the supervisory duties identified in their charters and regular internal reporting mechanisms to align them with the risks inherent in the activities of their companies.

Key points to remember

  1. Categories of risk that are critical and mission critical to a business require additional oversight (for example, aircraft safety is critical to an aircraft manufacturer’s mission and requires specific risk oversight).
  2. Boards should have systems in place to ensure board oversight of mission critical risks. Broad and unspecific language assigning to an audit committee or other committee of the board of directors the responsibility for overseeing general risk, without more, may not exempt a board of directors from its responsibility. Boards should review their governing documents, regular MD&A, and meeting agendas to ensure that their stated oversight responsibilities are explicitly tailored to the business risks inherent in the business. The appropriate board or committee should also periodically review emerging risks for potential inclusion in the process.
  3. Boards of directors should adapt regularly scheduled reports to substantially monitor and address these risks. An internal monitoring system should also be in place for whistleblowers and employees to report concerns that reach the board or board committees. Courts may not credit such systems if they are organized by senior management, or worse, if information does not regularly reach the board or board committees concerned.
  4. Companies should keep in mind that company-prepared records obtained by shareholders under Delaware General Corporate Law (DGCL) Section 220 requests may be used against them in derivative stadium lawsuits. advocacy, and that internal crisis management, investor relations and public relations documents should be prepared and reviewed pending disclosure to regulators or derivative applicants.
  5. Finally, when a crisis arises, the board and its advisers must be proactive, not passive. They must respond quickly and rigorously and must not sit back and wait for management to deal with the problem. The key is an oversight record of the board. Asking questions and digging into one problem will go a long way in defending another Maintenance mark Claim.

Delaware Court of Chancery decision

Under Regarding Caremark International, directors need only make a “good faith effort to put in place a reasonable system of oversight and reporting at the board level” in order to fulfill their duty of loyalty. In Marchand c. Barnhill (hereafter Trader),3 the court noted that Maintenance mark claims are “probably the most difficult theory in corporate law on which a plaintiff can hope to obtain a judgment”. The court in Trader, however, distinguished the plaintiffs’ claims arising from the deadly listeria-contaminated ice cream from the traditional financial damages alleged in Regarding Caremark International, such as general financial mischief and accounting fraud. It determined that certain categories of suspected wrongdoing, such as those involving food safety, were “mission critical and essential” for the business of the company, and oversight therefore needs to be “exercised more rigorously” . Ultimately, the Trader The court concluded that the board had not made a good faith effort to put in place a system of oversight and control.

In the case of Boeing relies on the Trader decision, believing that, as food security in Trader, aircraft safety is essential and essential to Boeing’s mission. Consequently, the court held that aircraft safety must be specifically provided for in the surveillance protocols; a general language common to many audit committee charters concerning risk oversight was generally insufficient. Although Boeing’s audit committee was charged with “general risk oversight,” the court noted that aircraft safety was not listed in the charter and the audit committee did not receive regular feedback. briefings or reports on aircraft safety, Federal Aviation Administration regulatory complaints, or employee safety concerns. . Instead, the court found that the audit committee was primarily focused on overseeing Boeing’s financial risk; the annual report reviewed by the audit committee on the corporate risk management process did not address aircraft safety risks, including the issues ultimately responsible for the two 737 MAX crashes, or any other issues manufacturing defect, focusing instead on the impact of manufacturing problems on the delivery aircraft. The court also noted that Boeing did not have an internal reporting system, which “exacerbated” existing gaps in board-level safety oversight that could alert the board or the board. audit of issues as they arose, relying instead on management to deal with complaints. The result was that mission critical security issues were not reported to the board.

In addition to potential risk oversight failures, the court turned its analysis to the Boeing board’s response and investigation into the causes of the two crashes. “[T]he Council dealt with [first] crash as an “anomaly”, a public relations problem and a risk of litigation, rather than investigating the safety of the aircraft and the adequacy of the flight certification process. does not indicate a mere “unsuccessful attempt” to deal with a red flag, and he “knew or should have known that his response to the [crash] Further, the court ruled that the board delayed any review and passively relied on management until a second plane crashes. To make this decision, the court relied on files produced in accordance with a request from the shareholders under the Ann Code. tit. . 8, § 220, which allows shareholders to inspect the books and records of a company. This highlights the importance of business mindfulness when creating documents that can portray the company as hijacking or downplaying issues, as Section 220 records are often used by shareholders pursuing derivatives. disputes. In the case of Boeing The move serves as a warning to boards of directors nationwide to take organized and deliberate steps to structure business risk oversight processes or risk pleading costly derivative lawsuits.


The key lesson from In the case of Boeing The decision is that boards should work with board management and advisors to identify potential critical risks inherent in the company’s business model before they arise. The board should then ensure that these risks are delegated to an appropriate board committee and reported in its charter. Boards should also document that the board or a relevant committee regularly reviews and receives reports related to these issues, and when an issue arises, ensure a strong crisis response that treats the issue as more than a public relations issue, and does not abdicate the responsibility of management. In addition, the imperatives of monitoring the risks of In the case of Boeing (and its track record) amplifies the guidance and commentary of the United States Securities and Exchange Commission regarding the responsibilities of boards of directors to oversee (and ensure adequate disclosure) of material risks, all the more reason for them. boards of directors to take the risk seriously.


1 2021 WL 4059934 (Dél. Ch. 7 Sept. 2021)

2 698 A.2d 959 (Del. Ch. 1996)

3 212 A.3d 805 (Del. 2019)


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