Regular readers know that the direction of Delaware's Caremark litigation worries me. See my blog post on the disastrous Boeing decision and my forthcoming article on how the Caremark mistake might evolve into imposing duties on directors who fail to conduct ESG oversight to the satisfaction of a Delaware jurist.
So I noted with great interest Roy Shapira's new article on Caremark:
In September 2021, the Boeing 737 Max debacle turned into an important moment in corporate law. A Delaware court allowed a derivative lawsuit brought by Boeing shareholders to proceed, based on the theory that Boeing’s directors breached their oversight duties by not doing enough to monitor, prevent, and react to fatal airplane safety issues. This Essay explains what the Boeing decision means for director oversight duties going forward, and uses it as a springboard to discuss broader trends in corporate law. Specifically, the Essay makes the following five contributions.
First, the Essay delineates the contours of a new era of heightened oversight duties. Corporate law courts are increasingly willing to designate certain compliance risks as “mission critical,” thereby activating an enhanced scrutiny mode. Boeing suggests that practically all directors of manufacturing companies are operating in or around the mission critical zone these days, and illustrates just how enhanced the scrutiny is once in this zone. Second, the Essay fleshes out a shift in focus: from scrutinizing compliance with regulations meant to protect investors (such as financial reporting), to scrutinizing compliance with regulations meant to protect broader societal interests (such as product safety). Boeing, for example, faults directors for focusing on restoring corporate profitability and image instead of putting consumer safety front and center. Third, the Essay uses Boeing to show how corporate law guides behavior not just directly, through legal sanctions, but also (and indeed more so) indirectly, through shaping norms and reputations in the business community. Boeing did not end in a verdict in favor of the plaintiffs: it was instead settled quickly after the motion to dismiss. Still, the case created significant changes in the advice that lawyers give their director clients, and in the volume and tone of media coverage, which in turn created reputational fallouts. Fourth, the Essay evaluates the desirability of the Boeing development. On one hand, the development holds the promise of mitigating incentives to remain ignorant, and improving accountability. On the other hand, Boeing may have gone too far in removing corporate law’s guards against hindsight bias. Finally, the Essay spotlights two big questions that Boeing left unanswered: officer oversight liability, and director liability for oversight of nonlegal requirements.
I lean so much to the "other hand" position, that I disagree with some of his "one hand" analysis, but I nevertheless think it is a very important article that deserves wide attention.
