“It has become among the hoariest of Chancery clichés for an opinion to note that a derivative claim against a company’s directors, on the grounds that they have failed to comply with oversight duties under Caremark, is among the most difficult of claims in this Court to plead successfully.” Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *1 (Del. Ch. Aug. 24, 2020).
As I explained in my post, Is Caremark still the hardest claim for plaintiffs to win in corporate law?, there has been a steady erosion of that principle in the Delaware courts. Indeed, it is getting easier and easier for a plaintiff to at the very least get past the motion to dismiss stage of the litigation (at which point the pressure on defendants to settle becomes almost unbearable).
Yesterday's opinion in In re The Boeing Company Derivative Litigation by Delaware Vice Chancellor Zurn is the latest nail in that cliche's coffin.
To be sure, VC Zurn's opinion includes the right quotes about how difficult it is to win on a Caremark claim. But I see a number of reasons to doubt whether those quotes mean all that much anymore.
Zurn relies heavily on Marchand. But Marchand involved an ice cream maker--a mono-line company--whose entire operations were shut down after a listeria outbreak resulted in the deaths of three customers. But here any alleged deficiencies went solely to the board's alleged lack of oversight with respect to one of Boeing's many products (namely the 737 MAX). Boeing never shut down its entire operation.
Now it is true that, as Zurn observes, "Like food safety in Marchand, airplane safety 'was essential and mission critical' to Boeing’s business, and externally regulated." But you could say the same thing about any manufacturer. After all, how many products these days come without safety warnings? How many production lines are not extensively regulated? Zurn's approach leaves every manufacturer vulnerable to Caremark claims.
Zurn echoes Marchand in complaining that Boeing had no board-level committee to supervise airline safety risk. But, prior to Marchand, it was hardly obvious that a board-level committee with respect to every major risk a company faces was a Caremark requirement. To the contrary, Caremark required that there be a process by which the board as a whole was kept informed.
Zurn also echoes Marchand in opining that the board didn't promptly discuss the first 737 MAX crash. But so what? Caremark requires ongoing supervision and the defendants apparently offered plenty of evidence that the board regularly discussed safety.
Zurn's dismissal of that evidence is really the key part of the opinion:
The Board and management’s passive invocations of quality and safety, and use of safety taglines, fall short of the rigorous oversight Marchand contemplates. (emphasis supplied)
If courts are going to examine board decisions about oversight with a microscope and mandate that oversight "be rigorous" then it is no longer true that Caremark claims will be the most difficult corporate law claims to prove. Indeed, that will no longer be a cliche but a falsehood.
Zurn condemns the board's post-crash effort to draw lessons learned, arguing that they evidence the board's pre-crash oversight failures. One wonders what that will do to the incentives of future boards to commission rigorous after-action reports? A board that does so will be shooting itself in the foot.
I am not claiming that Boeing's board was perfect. Far from it. But Zurn's opinion reads like a brief for the plaintiffs rather than an effort to hold plaintiffs to what is supposed to be an “onerous pleading burden.” At every turn, evidence favorable to the defendants is rubbished and evidence favorable to the plaintiffs is accepted. Granted, we're at the motion to dismiss stage. But Caremark claims are supposed to be disposed of at the motion to dismiss stage. See Elizabeth Pollman, Corporate Oversight and Disobedience, 72 VAND. L. REV. 2013, 2021-25 (2019) (finding that few cases alleging director-oversight failures survive the motion to dismiss stage).
I may be overreacting. If so, it is because I firmly believe Marchand was wrongly decided. Boeing seems like another step towards making Marchand the general standard and thereby continuing the evisceration of the supposed limits that remain on Caremark.
Those beliefs coupled with the trend in the Delaware courts towards making Caremark claims the easiest claims to prove in corporate law prompted me to write Don’t Compound the Caremark Mistake by Extending it to ESG Oversight (August 4, 2021). Business Lawyer (September 2021), UCLA School of Law, Law-Econ Research Paper No. 21-10, Available at SSRN: https://ssrn.com/abstract=3899528. If I may say so, Boeing makes that article's argument even more timely and essential.
Update: Kevin LaCroix is less alarmist, but concurs that we'll be seeing more of these cases.
