Jason R. Jones

A recent Delaware Court of Chancery decision serves as an important reminder that, pursuant to Caremark, Delaware courts will not second-guess business judgment in the absence of bad-faith intentional dereliction of duty or conscious disregard of a board’s responsibilities amounting to disloyalty.

In a memorandum opinion rendered on August 13 in In re The Boeing Co. Derivative Litigation, certain stockholders of The Boeing Co. filed a derivative complaint against certain directors and officers alleging the breach of fiduciary duties involving bad-faith oversight failures by the defendants under the Caremark doctrine in connection with a mechanical failure of a Boeing aircraft. The Chancery Court granted the defendants’ motion to dismiss due to the plaintiffs’ failure to plead the crux of Caremark: bad faith.

Aircraft Incident Leads to Filing of Caremark Claims

In 2024, one of the door plugs in a Boeing aircraft operated by Alaska Airlines flew off in flight, leaving a hole in the aircraft and resulting in injury to seven passengers and a crew member. An investigation by the National Transportation Safety Board determined that the cause of the incident was missing bolts in the door plug. Prior to the incident, Boeing performed certain rework on the jet’s fuselage to replace defective rivets, which required opening the door plug by removing four bolts that secured the plug to the fuselage. The defective rivets were replaced, but the removed bolts were not.  

The plaintiffs filed a stockholder derivative complaint asserting a breach of fiduciary duty claim against the defendants pressing two bad-faith oversight failures under the Caremark doctrine (In re Caremark International Derivative Litigation). They alleged that Boeing’s board of directors saw dozens of red flags warning of systemic airplane manufacturing issues leading up to the door-plug blowout incident and alleged that the board ignored the red flags and implemented a production schedule that pushed profits over safety. The defendants moved to dismiss.

What the Chancery Court Found

The Chancery Court noted that Delaware law presumes directors perform their duties, including their oversight responsibilities, in good faith and with reasonable care, including their responses to reporting of significant legal and compliance risks. The court further noted that Caremark imposes liability for bad faith amounting to a breach of loyalty and that Caremark liability centers on a particular type of bad faith: “intentional dereliction of duty” or “conscious disregard for one’s responsibilities.” Only a sustained or systemic failure of the board to exercise oversight will establish the lack of good faith that is a necessary condition to liability. The court further noted that fiduciaries who try to implement and attend to a reasonable board-level system of monitoring and reporting have met their baseline duty under Caremark.

The court found that the plaintiffs’ Caremark theory was premised on the board’s inaction upon receipt of dozens of alleged red flags concerning systemic manufacturing issues. The court noted that, as detailed in the plaintiffs’ complaint, Boeing elevated airplane safety into a standing item discussed at every board and independent board Aerospace Safety Committee meeting and that its Audit Committee also monitored Boeing’s compliance with Federal Aviation Administration regulations and other matters. The board and Aerospace and Audit committees received routine reports on airplane safety and each of those routine reports kept the board abreast of virtually every key operational risk. The court noted that from that reporting, the plaintiffs presented 95 pages of allegations reciting routine board and committee reports, presentations, and updates delivered over a three-year period. The plaintiffs contended that nearly every update the board received about Boeing’s manufacturing risks amounted to a red flag.

The court found that the breadth of the plaintiffs’ theory risks recasting the volume and depth of Boeing’s reporting from a best practice into evidence of disloyalty. The court found that Caremark is rightly seen as a prod toward the greater exercise of care by directors in monitoring their corporations’ compliance with legal standards and that Caremark sets a baseline requirement for boards to take compliance seriously. It is not an avenue to hold corporate fiduciaries personally liable for doing what Caremark requires them to do — to make a good-faith effort to implement an oversight system and then monitor it. The court found that the board received reporting on an ongoing risk that management was working up and iteratively addressing, not a red flag of persistent noncompliance requiring board action to avoid illegality and traumatic consequences.

The court noted that as it relates to Caremark liability, it is appropriate to distinguish between a board’s oversight of a company’s management of business risk from a board’s oversight of a company’s compliance with law. The court noted that business matters are often complex, without a clear correct answer and that it is almost impossible for a court, in hindsight, to determine whether a company properly evaluated risk and made the right business decision. Regulations and statutory obligations, however, provide clear guidance for directors overseeing legal risk. The court found that many of the purported red flags in this case spoke to business risk, not legal risk, including risks related to a new and inexperienced workforce, a tough recruiting environment, unforeseen defects discovered along the supply chain requiring rework, and unpredictable delays in the manufacturing process sometimes requiring out-of-sequence traveled work. The plaintiffs alleged that those issues may invite human and manufacturing error. The court found that addressing such general risks may be evidence that the reporting system is working as it should.

The court further noted that red flags must be sufficiently similar to the corporate trauma in question such that the board’s conscious inaction proximately caused that trauma. General risks are not red flags of a specific corporate trauma. The court found, in this case, that much of the reporting received by the board had nothing to do with the causes of the door-plug blowout.

Accordingly, in the absence of a bad-faith dereliction of duty upon seeing a red flag, the court granted the defendants’ motion to dismiss.

Lessons Learned

Existence of a well-designed and implemented system of board oversight can be strong evidence of exercise of the due care and reasonable business judgment required of corporate boards. Corporate boards should implement robust procedures for reporting and monitoring compliance with laws and regulatory obligations and risks of serious corporate trauma (e.g., red flags). This includes maintaining records of the board’s oversight of such matters in minutes of the meetings of the board and any applicable board committees to provide a defense against Caremark claims.