Tuesday, November 19, 2019
Boeing faces good faith claim
Following on the heels of Marchand and Clovis Oncology, there now looks like a viable path for good faith claims - at least through a 23.1 motion to dismiss. Successful claims had been as rare as "Nessie", but in the span of a few month a narrow avenue for plaintiffs has opened up. In Clovis, Vice Chancellor Slights summarized the current state of play as follows:
Our Supreme Court's recent decision in Marchand v. Barnhill underscores the importance of the board's oversight function when the company is operating in the midst of "mission critical" regulatory compliance risk. The regulatory compliance risk at issue in Marchand was food safety and the failure to manage it at the board level allegedly allowed Blue Bell Creameries to distribute mass quantities of ice cream tainted by listeria. The Court held that Blue Bell's board had not made a "good faith effort to put in place a reasonable system of monitoring and reporting" when it left compliance with food safety mandates to management's discretion rather than implementing and then overseeing a more structured compliance system.
As Marchand makes clear, when a company operates in an environment where externally imposed regulations govern its "mission critical" operations, the board's oversight function must be more rigorously exercised. Key to the Supreme Court's analysis was the fact that food safety was the "most central safety and legal compliance issue facing the company." To be sure, even in this context, Caremark does not demand omniscience. But it does demand a "good faith effort to implement an oversight system and then monitor it." This entails a sensitivity to "compliance issue[s] intrinsically critical to the company.
Now comes Boeing. The mess with the 737 Max is well known to everyone who has been on a plane in the last year. The issue though, how responsive was the board to the problems in front of it. After a 220 books/records action, plaintiffs have now filed a derivative suit against the board alleging they violated their oversight obligations by not attending to the mission critical regulatory issues raised by the 737 Max. You can find the complaint here: Kirby Family LP v. Muilenburg et al. If you had asked me last year what the prospects of this litigation would have been last year, I'd have said not great. But, post Marchand and Clovis, I suspect this may well get past a 23.1 motion. We'll see though.