Max Oversight Duties: How Boeing Signifies a Shift in Corporate Law.

• Author: Shapira, Roy

In September 2021, the Boeing 737 Max debacle turned into a pivotal 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 Article 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 Article makes the following five contributions.

First, the Article 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 a heightened 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 Article 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 Article 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 Article evaluates the desirability of the Boeing development. On the one hand, the development holds the promise of mitigating incentives to remain ignorant, thereby improving accountability. On the other hand, Boeing may have gone too far in removing corporate law's guards against hindsight bias. Finally, the Article spotlights two big questions Boeing left unanswered: officer oversight liability and director liability for oversight of nonlegal requirements.

Max Oversight Duties:

How Boeing Signifies a Shift in Corporate Law

Roy Shapira

Introduction 120 I.The Boeing Case 123 A. Factual Background 123 B. Legal Analysis 125 II.What Boeing Teaches Us about Oversight Duties and Corporate Law 127 A. Boards Face More Rigorous Scrutiny 127 B. Shareholders Enjoy More Expansive Inspection Rights 129 C. Corporate Law Guides Behavior Indirectly, through Law Firm Memos and Reputational Fallouts 130 III.Is the Boeing Development Desirable? 135 A. The Good: Balancing the Flaws of Other Enforcement Systems 136 B. The Questionable: Hindsight Bias and Perverse Incentives 139 Conclusion 141 INTRODUCTION

Two Boeing 737 Max airplanes crashed within months of each other, killing all 364 passengers and crew members aboard. (1) The crashes ignited a heated discussion over airplane safety regulation. (2) Then, a year and a half later, the Max debacle turned into a pivotal moment in corporate law. In September 2021, a Delaware court allowed a derivative lawsuit brought by several Boeing shareholders to proceed, finding it reasonable to infer that Boeing's directors had breached their oversight duties by not doing enough to monitor, prevent, and react to the 737 Max safety issues. (3) The Boeing case signifies a shift in the way that corporate law treats the protection of broader societal interests. For decades, corporate law has remained relatively silent on issues of product safety and corporate compliance more generally. Yet, over the past two years, a chain of successful failure-of-oversight claims (dubbed "Caremark" claims, after Delaware's leading precedent) has signaled a new era in director oversight duties.

The Boeing case perfectly illustrates the two pillars of this new Caremark era: willingness to apply heightened scrutiny of board oversight efforts and willingness to grant shareholders access to internal company documents in order to investigate potential failure-of-oversight claims.

First, Boeing shows just how much Delaware courts are willing to designate certain compliance risks as "mission critical." Not all potential risks are created equal from a board-oversight-duties perspective. Risks that implicate the core business of the company and are externally regulated earn the mission-critical designation, which means that the courts will scrutinize board oversight of those risks more rigorously. (4) While many past Caremark cases scrutinized compliance with regulations meant to protect investors qua investors (such as financial reporting requirements), nowadays, courts increasingly scrutinize compliance with regulations meant to protect broader societal interests (such as product safety). The Boeing decision, in particular, faults directors for managing the Max crisis with a focus on restoring profitability and image concerns instead of putting consumer safety front and center. (5) Further, while other recent cases have applied enhanced scrutiny of product safety in the context of smaller companies whose existence depends on one product line, Boeing applies it in the context of a giant company with numerous subunits. (6) Following Boeing, all directors of manufacturing companies arguably operate in or around the mission-critical zone. (7)

Second, Boeing shows just how much outside shareholders can utilize their inspection rights to hold directors accountable for oversight failures. Shareholders have always enjoyed a qualified right to inspect their company's "books and records," nestled in Delaware's Section 220. (8) But in recent years, courts have liberalized their interpretation of Section 220's requirements so that they now order provision of documents in more cases and order provision of more types of documents. (9) From this vantage point, the most important part of the Boeing decision is footnote one. Vice Chancellor (VC) Zurn tells us there that the entire case rests on a prior Section 220 request, which provided plaintiffs with access to over 44,000 internal documents containing 630,000 pages about Boeing's oversight of airplane safety. (10) Such richness of detail allows outside shareholders to plead with particularity facts about what corporate insiders knew, when they knew it, and what they did or did not do to address problems in real-time. Armed with such a powerful pre-filing discovery tool, plaintiffs these days are more likely to be able to show that the board never even discussed a critical compliance issue, or that the board was notified of a critical issue yet failed to make efforts to remedy it.

The combination of heightened scrutiny and liberalized inspection rights allows shareholders to regularly overcome what once seemed like an insuperable pleading hurdle in oversight cases. The chain of recent successful Caremark claims is, therefore, a trend, and Boeing signals that the trend is only intensifying. This Article uses Boeing as a springboard to delineate the contours of this new mode of heightened oversight liability, evaluate its desirability, and generate implications for academics and policymakers.

The Article proceeds in three parts. Part I describes the Boeing case: from the corporate governance problems behind the Max debacle to the unique procedural aspects of the court decision.

Part II explains what Boeing means for director oversight duties going forward and what it tells us about how Delaware corporate law works more generally. Boeing expanded the zone of heightened scrutiny of board oversight so that it now applies to more boards. It also evidences how heightened the scrutiny is once a board is in the zone, along the following two dimensions: (1) scrutinizing directors not just for what they knew but also for what they should have known, and (2) scrutinizing directors not just for doing nothing but also for not doing enough. More generally, Boeing illustrates how corporate law guides behavior even in the absence of verdicts reached after a full trial. Part II analyzes the content of law firm memos and media coverage following Boeing to highlight how even a decision in a preliminary stage (motion to dismiss) can reshape the legal advice that corporate directors receive and reshape the reputations of said directors and their companies.

Part III evaluates the desirability of these new developments in corporate law. Overall, the revamped approach to oversight duties seems desirable, as it holds the potential to balance the flaws of other enforcement mechanisms. Pertinently, the new Caremark era can mitigate the tendency toward willful blindness. Corporate directors have strong incentives to remain ignorant about decisions that prioritize profits over safety or skirt regulatory requirements more generally. Prioritizing profits is good for directors who receive substantial stock-based compensation. And remaining ignorant about how profits were obtained is good for directors' ability to maintain plausible deniability and escape accountability. The new mode of oversight duties litigation, as illustrated in Boeing, counters these dynamics by emphasizing culpable ignorance (faulting directors for what they should have known) and proper documentation (incentivizing more upwards flows of information).

Still, in some particular areas, the Boeing development may have strayed too far from well-accepted Delaware principles, and Part III details four aspects worth worrying about going forward. The Boeing development seemingly (1) removes some guards against hindsight bias, (2) disincentivizes investments in subsequent remedial...