Michael W. Peregrine and Nathan Barnett
In the following guest post, Michael W. Peregrine and Nathan Barnett examine a recent Delaware Chancery Court decision dismissing oversight claims against Boeing directors arising from the January 2024 mid-air door-plug incident. As they explain, the decision provides important guidance on the continuing application of the Delaware courts’ Caremark doctrine, reaffirming that bad faith remains the essential prerequisite for oversight liability, clarifying the distinction between compliance risks and business risks, and offering additional insight into what constitutes a true “red flag” for board oversight purposes. The authors also discuss the practical governance lessons boards can draw from the decision and the importance of maintaining a robust compliance framework. Michael Peregrine is a retired lawyer and a fellow of the American College of Governance Counsel, and Nathan Barnett is a partner with McDermott, Will &Schulte LLP. Our thanks to Michael and Nathan for allowing us to publish their article on our site.
A recent decision of the Delaware Chancery Court provides welcome clarity to corporate directors regarding fiduciary liability for alleged oversight failures (a “Caremark” claim), and related expectations of director conduct. [1]
More particularly, the decision confirms that “bad faith” remains the fundamental prerequisite for applying Caremark liability, validates the distinction between compliance/regulatory risks and traditional business risks for Caremark purposes, provides guidance on conduct that may constitute bad faith, and offers a helpful definition of what may constitute a “red flag” of potential liability.
To recall, Delaware courts have applied Caremark to establish a standard for director liability based on two specific claims arising from bad faith conduct; i.e., that the directors either (a) “utterly failed to implement any reporting or information system or controls” [to facilitate board oversight] or (b) “having implemented such a system or controls, consciously failed to monitor or oversee its operations, thus disabling themselves from being informed of risks or problems requiring their attention.”[2]
The current case arose from the mid-air separation of an improperly installed cabin door on a Boeing aircraft. This incident occurred while Boeing was subject to a deferred prosecution agreement with the U.S. Department of Justice arising from previous air safety incidents, and Boeing had implemented multiple governance and compliance controls in response to those incidents and to that agreement. These included the maintenance of two separate board committees – the Audit Committee and the Aerospace Safety Committee – to provide operational oversight, and the formation of a Product and Services Safety Organization that reported to the Aerospace Safety Committee. Extensive composition and reporting requirements were also assigned to these bodies.
The plaintiffs brought a derivative action, alleging that Boeing officers and directors breached their oversight responsibilities by inattentiveness to multiple alleged “red flags” of ongoing product safety concerns (referring to numerous routine board and committee reports presented over a period of time). But finding no evidence of bad faith (e.g., dereliction of duty upon seeing a red flag), the court granted Boeing’s motion to dismiss. [3]
Particularly noteworthy aspects of the ruling for corporate directors include the following:
- The Presumption of Good Faith: “Delaware law presumes that corporate directors will conduct their duties, including those related to oversight, in good faith and with reasonable care, even if hindsight reflects poorly on such conduct.” This presumption extends to board responses to significant legal and compliance risks.
- The Prerequisite for Liability: The court’s decision makes clear that “[T]he crux of Caremark is bad faith.” To sustain a Caremark claim requires particularized allegations of a sustained or systemic failure of the board to exercise oversight, e.g., ‘intentional dereliction of duty’ or ‘conscious disregard for one’s responsibilities.’ More plainly, “directors must know that they were not discharging their fiduciary obligations.”
- Compliance Risk v. Business Risk: For Caremark liability purposes, there is a fundamental distinction between the board’s oversight of business risks (e.g., those risks inherent in the company’s business plan) from its oversight of compliance with positive law. Business risks are “shades of gray,” while legal compliance risks are “black and white.” The board satisfies its baseline oversight responsibilities by establishing a compliance reporting system. How it responds to information generated by that system is a matter of business judgment (absent indications that the board consciously ignored that the corporation was violating laws or regulations or was otherwise headed for corporate trauma).
- What Constitutes a “Red Flag”: A Caremark-level “red flag” is evidence of a warning sign “bright enough to put the board on notice that the corporation was violating the law or otherwise headed for a corporate trauma…a development that inspires a need to act so clear that to ignore it implies a conscious disregard of duty.” A red flag must also be connected to the corporate trauma at issue, in a manner that conscious board inaction could be determined to be a proximate cause of the trauma. Regular internal reporting to the board on operational risks, the status of internal investigations and active remediation efforts does not necessarily constitute “red flags” but rather may demonstrate the effectiveness of the company’s compliance program. Courts will not infer that, because the board knew the company faced general safety risks and those risks materialized in a loss for the company, the board must have known the company was operating unlawfully.
Practical Board Lessons
Corporate boards should take comfort from those elements of the Boeing decision that apply a strict, as opposed to floating, interpretation of the Caremark scienter requirement, support good faith board oversight judgments on business risk, and provide a controlled definition of “red flags”.
Yet the broader lesson from Boeing may be the importance of a conscientious approach by the board to organizational compliance risk management, i.e., the value of investing in a compliance system that clearly demonstrates good faith. In Boeing, even though the critical elements of the compliance system were mandated by government settlement, the good-faith satisfaction of those mandates and assiduous adherence to established governance practices by the board and management contributed significantly to the court’s decision.
The old saying, “You may enjoy reaching your destination, but you won’t necessarily appreciate the drive,” applies well to compliance risk management. This, regardless of whether it arises in the context of a shareholder derivative action, some other regulatory or litigation action challenging board oversight, or a media focus. The stronger the demonstration of corporate oversight, the greater the possibility of stopping an oversight challenge early in “the drive” and avoiding the organizational and individual director costs and distraction likely to be incurred in ultimately reaching the desired destination.
This is particularly important given the recent formation of the National Fraud Enforcement Division of the Department of Justice, its broad-based fraud prevention mandate, that mandate’s particular application to certain types of corporate fraud, and the substantial federal resources contributed in support of the Division’s efforts. [4]
This latest Boeing decision demonstrates the “low bar” of board action necessary to successfully overcome a traditional Caremark challenge. But it also serves to incentivize boards to maintain substantive governance oversight protocols rather than simply relying on satisfaction of the “low bar” as a sufficient defense.
[1] In re Boeing Co. Deriv. Litig., Consol. C.A. No. 2024-1210-MTZ, slip op. at 1-2, 21-22, 40, 43-44 (Del. Ch. Aug. 13, 2026).
[2] See, e.g., Michael W. Peregrine and Charles W. Elson, “Potentially Unfinished Leadership Business from the McDonald’s Decisions”, The Harvard Law School Forum on Corporate Governance, September 26, 2023.
[3] More particularly, the Chancery Court held that the Defendants did not face a substantial likelihood of liability under Caremark and therefore demand on the company’s board of directors to bring the derivative lawsuit was not excused.
[4] “Assistant Attorney General Colin M. McDonald Issues Memorandum on the National Fraud Enforcement Division’s Enforcement Policies”; United States Department of Justice, August 13, 2026.
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