Steph Blog

By Stephanie White

Steph Blog

To Hold Liable or Not

          There is often much debate on whether directors and board members of businesses should be held personally liable for their actions within the company. One approach to this issue is that these individuals are acting in their official capacity within the company, so the company should be liable for any claims against these individuals. On the other hand, another approach is that these individuals should be held personally liable instead of the company. A case involving Boeing Company (“Boeing”) addresses this heavily debated issue.

Safety Was Not a Priority for Boeing Company

           Our story starts with an extensive history of Boeing’s lack of airplane safety procedures. Boeing’s business model started with a focus on engineering and safety; but in 1997, Boeing obtained another company and shifted their focus to cutting costs in airplane production.[1] This was the event that began a lengthy history of a lack of focus within the company’s safety procedures. In 2000, Boeing’s engineers performed a strike as they felt they lost their voices in the decision-making process of the company.[2] As a result, Boeing moved its headquarters to escape this protesting.[3] Boeing saw an influx in safety violations, resulting in fines, from the Federal Aviation Administration (“FAA”) in the early 2000s.[4] In 2013, a Boeing plane was grounded by the FAA, and a plane crash was caused by insufficient documentation and training.[5] Several civil cases based on airplane safety were filed in 2015, resulting in more fines by the FAA.[6] In addition to these issues, Boeing did not have any Board-level procedures or committees for oversight and discussion of safety.[7] Boeing’s management team did not report safety information or employee complaints to the Board of Directors (“Board”), as there was no mechanism or procedures implicated to do so.[8]

          In the development and production of the Boeing 737 MAX aircraft (“737”), Boeing’s primary concerns were not with safety, but with how quickly and cost-effectively they could produce this product.[9] The 737 was derived from another existing plane to speed up the approval process by the FAA.[10] A Maneuvering Characteristics Augmentation System (“MCAS”) was implicated due to the shift in the plane’s center of gravity causing the 737 to tilt too far upwards.[11] The MCAS was supposed to push the airplane’s tail up and nose down by using an external sensor which was extremely sensitive and flagged by the FAA.[12] Despite concerns and data showing the MCAS was at high risk of activation even in unnecessary circumstances, Boeing failed to disclose this information to the FAA.[13] In addition, Boeing stated that a computer training program was sufficient for pilots operating the 737 instead of a flight simulator due to concerns of the high cost of simulation training.[14] Even further, a Chief Technical Pilot was aware of the MCAS’s defects when in flight simulation, but did not report these defects to the FAA.[15] The FAA approved the computer training program for the 737, resulting in a lack of mentioning the MCAS in pilot training materials and manuals.[16] Boeing continued to conceal problems with the MCAS and its external sensor, and the demand for these aircrafts grew at exponential rates.[17] There were multiple safety concerns and complaints from employees which were brought to the attention of the management of Boeing, but none of these concerns were brought to the Board’s attention.[18]

Horrifying Results of Boeing’s Lack of Safety Procedures

            On October 29, 2018, a Lion Air 737 crashed into the sea due to the MCAS, resulting in the death of all the people on board.[19] The Board was not made aware of the Lion Air crash by management until over a week later.[20] Correspondence from Dennis A. Muilenburg (“Muilenburg”), Chairman of the Board who assured the Board of the 737’s safety and blamed Lion Air for the crash, held an optional meeting of the Board that was more focused on the public relations and financial disaster rather than safety concerns of the 737.[21] In December, the Board formally met and addressed the Lion Air crash, but their main concerns were about profits and efficiency, excluding a brief mention of 737 software updates to improve safety.[22] In February, Muilenburg sent an update to the Board mainly focusing on financials and media coverage with a brief statement about the software update, and Boeing delaying their investigation into the Lion Air crash.[23] By January 2019, a criminal investigation into Boeing’s defrauding of the FAA was opened by the Department of Justice, which resulted in $2.513 billion in fines, including payments to customers and a crash-victim beneficiaries fund.[24] What happened next is shocking.

            On March 10, an Ethiopian Airlines 737 crashed after takeoff due to the MCAS repeatedly activating, resulting in the death of all on board.[25] Once again, Boeing blamed the pilots of the airline for not being able to rectify the issue. Muilenburg’s correspondence with the Board was pertaining more to the concern with public relations and financial implications instead of safety concerns.[26] At this time, one-third of in-service 737s were grounded by the FAA, and Muilenburg met with government executives to keep the rest of the 737s in the air.[27] The FAA determined this second crash was similar to the previous Lion Air crash and grounded all 737s.[28] At this point, the need for attention to safety was finally recognized by Boeing.[29]

Boeing Implicated Safety Measures and Experienced Consequences

            Muilenburg added safety concerns into monthly reports to the Board, but some directors began to question Boeing’s approach to the crashes, with director David L. Calhoun (“Calhoun”) suggesting a Board meeting on product safety.[30] In April, the Board devoted significant amounts of time to safety discussions about the MCAS, pilot training, FAA certification, and a Board-level safety reporting committee was implicated for the first time.[31] Between April and August, the committee’s discussions with the Board included the topic of safety, and the committee requested information about what caused the two plane crashes.[32] More committees and procedures based on product safety reporting were created, including a committee which made it possible for employee complaints to reach the Board.[33]

          While implicating these safety procedures, lead director Calhoun held multiple interviews where he made false representations about Boeing’s response to the crash and the grounding of the 737.[34] Muilenberg was voted to be terminated with Calhoun to replace him by the Board framing this action as a resignation and retirement to the public to enable Muilenburg to keep equity awards in the approximate amount of $38,642,304.[35] Calhoun shifted the blame of the two crashes away from the Board by publicly condemning Muilenburg’s authority.[36] In the end, the 737 spent twenty months on the ground, and federal mandates required Boeing to fix the MCAS, the external sensor, and reconstruct the training regimen for pilots.[37] There were also a plethora of derivative actions filed as a result of the two crashes which were consolidated.[38] The two counts in the final amended complaint were as follows:

Count I asserts a derivative claim for breach of fiduciary duty against the Director Defendants, alleging they consciously breached their fiduciary duties and violated their corporate responsibilities by (1) before the Lion Air Crash, failing to implement any reasonable information and reporting system to monitor and oversee the safety of Boeing’s airplanes; (2) after the Lion Air Crash, despite being made aware of red flags concerning the operation, development, and nondisclosure of MCAS, consciously disregarding their duty to investigate and to remedy any misconduct uncovered; and (3) after the Ethiopian Airlines Crash, falsely assuring the public about the safety of the 737 MAX and MCAS and deciding to cash out Muilenburg’s unvested equity-based compensation. Count II asserts a derivative claim for breach of fiduciary duty against the Officer Defendants, alleging they consciously breached their fiduciary duties or, at a minimum, acted with gross negligence by (1) consciously and repeatedly failing to implement and actively monitor or oversee a compliance and safety program; (2) consciously disregarding their duty to investigate red flags and to remedy any misconduct uncovered; and (3) covering up the extreme safety risks of Boeing’s aircraft.[39]

The Defendants moved to dismiss the claims under Court of Chancery Rules 12(b)(6) and 23.1.[40]

The Court of Chancery of Delaware Speaks

            The Court of Chancery of Delaware begins its opinion in this case with outlining the rules to be applied.[41] The Court explains that before a stockholder can go after management on behalf of the company for breach of their duties or being unfit, the stockholder must satisfy Rule 23.1’s requirements.[42] For Rule 23.1, “the stockholder must plead with particularity either that she made a demand on the company’s board of directors to pursue particular claims and was refused, or why any such demand would be futile, thereby excusing the need to make a demand altogether.”[43] In this case, the appropriate rule for determining if a claim is futile comes from Rales v. Blasband, which asks the question of “whether the board can exercise its business judgment on the corporate behalf in considering demand.”[44] This question is answered in the negative if the director “faces a ‘substantial likelihood of liability’ for [their] role in the alleged corporate wrongdoing; or [the director] is not independent of another interested fiduciary.”[45]

            The Court evaluates a director’s personal liability by using the standard from In re Caremark International Inc. Derivative Litigation, which holds directors personally liable in failing to oversee company operations only when they act with scienter by knowingly acting inconsistently with their fiduciary duties.[46] Ways to show this oversight liability include “either that (1) ‘the directors utterly failed to implement any reporting or information system or controls’; or (2) ‘having implemented such a system or controls, [the directors] consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention’” (“Two Prong Test”).[47] This rule implicates a showing of bad faith to prove director oversight liability.[48]

            In Count I of the complaint, the Plaintiffs asserted the first prong of the Two Prong Test was satisfied as the Board failed to control and implicate recording and information procedures.[49] Under this part of the analysis by the Court, Vice Chancellor Zern turns to the business judgment rule, which states that directors can use their judgment when acting on behalf of the company, but they must act in good faith and on behalf of the best interests of the company.[50] The directors showings of bad faith included: (i) how Boeing lacked a committee for safety, (ii) Boeing did not oversee or discuss safety regularly, and (ii) Boeing lacked managerial safety reports.[51] It was also mentioned how managers received employee complaints and safety concerns, but those concerns never reached the Board due to its failure to implicate a system for reporting.[52] The Board acknowledged their failures in emails about their shortcomings and by making false public statements about safety precautions.[53] In conclusion, the Court decided the Board breached their duties with scienter by acting inconsistently with fiduciary duties and knowing of their failures.[54]

           Plaintiffs then asserted the second prong of the Two Prong Test was satisfied because the Board ignored the first crash, which lead to the second crash.[55] To satisfy this prong, the Plaintiffs were required to show the Board knew of corporate misconduct and responded in bad faith by ignoring rather than addressing said conduct.[56] The Court concluded this prong was satisfied for multiple reasons, including the facts that: (i) the Board had no systems to learn about the first crash, (ii) the Board did not request any information on that subject, and (iii) the Board did not receive any information on that crash until a week later.[57] Furthermore, the first crash was heavily reported in the media which would have put the Board on notice, but the Board ignored those reports.[58] In addition, the record does not show directors requesting or receiving written information about the MCAS, its external sensor, FAA certification, pilot training, or general airplane safety.[59] The following also show how the second prong is met: (i) An optional Board meeting, (ii) a delay in Boeing’s investigation of the first crash, and (iii) the treatment of the event as a public relations issue.[60] In conclusion, the Board either knew or should have known of its failures in its response to the first crash which, could be seen as causing the second crash, meets the requirements of the second prong.[61]

           There was also a claim in Count I by the Plaintiffs in reference to the Board allowing Muilenburg to retire and receive equity, while they were aware of his misleading behavior and inadequate response to the crashes.[62] Plaintiffs theorized the Board did this to pay off Muilenburg, but the Court shut this theory down by stating there was no evidence reasonably leading to this conclusion.[63] The business judgment rule was referenced again when the Court stated that the Board’s actions in reference to Muilenburg’s retirement were to advance the company’s legitimate business objectives of avoiding economic and reputational harm.[64] As for Count II, it was dismissed because it was not particular enough to meet Rule 23.1’s standards.[65]

Future Implications of a Grave Decision

            A statement could be made that the decision in this case could open the door for plaintiffs to hold directors of businesses personally liable for their actions within the company. This is concerning, as some directors may act within the company under the impression that they will receive protection from liability. In Delaware, this assumption may no longer be true due to this case. This case brings potential detrimental effects onto the world of Delaware corporate law. Instead of businesses being held liable as an entity, plaintiffs may go after directors personally. This sheds the shield of protection directors may have from liability. There may be a “trickle-down” effect of this ruling, as directors may now be in fear to act in their day-to-day occupations as directors. This may lead to fear which could affect how businesses operate as a whole and how they make their decisions.

           There is an argument that this ruling may improve conditions within businesses, as directors may be more inclined to act morally and ethically in their duties as directors. While this may be true due to director’s fear of consequences of being personally sued, there is a strong assertion that directors deserve protection for their actions on behalf of the company. There is also the concern that this ruling will increase corporate litigation volume in Delaware, as plaintiffs can now go after directors personally, which may inspire increased litigation. The business judgment rule requires that directors acted in good faith in the best interests of the company.[66] In essence, this ruling may lower the threshold of protection under the business judgment rule for director personal liability, which may expose directors to more liability. In conclusion, the ruling in this case may lead to more negative effects than positive on the world of Delaware corporate law and litigation.

About The Author

Stephanie is a 2L Regular Division student at Widener University Delaware Law School in pursuit of her juris doctorate degree. She is the incoming Senior Staff Editor of the Delaware Journal of Corporate Law. She is also the Academic Chair of Phi Alpha Delta. After graduation in 2024, Stephanie hopes to pursue a career in personal injury and workers’ compensation.

[1] See In re Boeing Co. Derivative Litig., No. 2019-0907-MTZ, 2021 WL 4059934, at *3 (Del. Ch. Sept. 7, 2021).

[2] Id at *4.

[3] Id.

[4] Id.

[5] In re Boeing, 2021 WL 4059934, at *4.

[6] See id.

[7] Id. at *5–6.

[8] Id. at *7.

[9] In re Boeing, 2021 WL 4059934, at *8.

[10] See id. at *7–8.

[11] Id. at *8.

[12] Id.

[13] In re Boeing, 2021 WL 4059934, at *9.

[14] See id. at *9.

[15] Id.

[16] Id. at *10.

[17] Id. at *10–11.

[18] See In re Boeing, 2021 WL 4059934, at *11–12.

[19] Id. at *12.

[20] Id. at *13.

[21] Id. at *2, *13–14.

[22] See In re Boeing, 2021 WL 4059934, at *14.

[23] Id. at *15.

[24] Id.

[25] Id at *16.

[26] See In re Boeing, 2021 WL 4059934, at *16..

[27] Id.

[28] Id. at *17.

[29] Id.

[30] See In re Boeing, 2021 WL 4059934, at *2, *17–18.

[31] Id. at *18.

[32] Id.

[33] Id. at *19.

[34] See In re Boeing, 2021 WL 4059934, at *19.

[35] Id. at *19–20.

[36] Id. at *20.

[37] Id.

[38] See In re Boeing, 2021 WL 4059934, at *20.

[39] Id.

[40] Id. at *21.

[41] Id. at *21–23.

[42] See In re Boeing, 2021 WL 4059934, at *21.

[43] Id.

[44] Id. at *22; See Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).

[45] See Rales, 634 A.2d  at 934.

[46] See In re Boeing, 2021 WL 4059934, at *21; See also In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996).

[47] See In re Boeing, 2021 WL 4059934, at *24; see also Caremark, 698 A.2d at 967 (Del. Ch. 1996).

[48] See In re Boeing, 2021 WL 4059934, at *25.

[49] Id.

[50] Id.

[51] Id.

[52] See In re Boeing, 2021 WL 4059934, at *31–32.

[53] Id. at 32.

[54] Id.

[55] Id at *33.

[56] See In re Boeing, 2021 WL 4059934, at *34.

[57] Id.

[58] Id.

[59] Id.

[60] See In re Boeing, 2021 WL 4059934, at *34.

[61] Id.

[62] Id. at *35.

[63] Id.

[64] See In re Boeing, 2021 WL 4059934, at *35–36.

[65] Id. at *36.

[66] Id at 25.