In the News

Split 7th Circ. Says Boeing Can’t Curb 737 Max Derivative Suit


January 10, 2022

A split Seventh Circuit panel said Friday that Boeing can’t use its bylaws to prevent shareholders from bringing federal derivative claims alleging its board directors and officers issued false and misleading statements concerning the 737 Max jets in the years leading up to two fatal crashes.

The 2-1 appellate panel revived a shareholder derivative suit that the Seafarers Pension Plan had filed in Illinois federal court alleging current and former board members and executives of The Boeing Co. issued false and misleading proxy materials about the development and operation of the 737 Max from 2017 to 2019.

The Seventh Circuit majority overturned a Northern Illinois district court’s June 2020 decision dismissing the suit based on a forum selection clause in Boeing’s bylaws establishing that the Delaware Chancery Court is the “sole and exclusive forum” for any derivative action or proceeding brought on behalf of the corporation. Boeing’s headquarters are in Chicago, but it’s incorporated under Delaware law.

The panel’s majority concluded Friday that Boeing’s forum selection bylaw is unenforceable in this case because it runs afoul of Delaware corporation law and federal securities law.

. . .

Seafarers alleges that Boeing’s false and misleading proxy statements hurt the company by “enabling the improper re-election of directors who had for years tolerated poor oversight of passenger safety, regulatory compliance, and risk management during the development of the 737 Max airliner.”

Seafarers also alleges that the false and misleading statements were used to obtain shareholder votes to reelect and entrench the very board members whose oversight failures led to the 737 Max disasters, as well as to approve executive compensation packages and reject shareholder proposals that sought to separate the roles of the CEO and the board chairman, according to court documents.

The 737 Max was involved in two fatal overseas crashes in five months: the October 2018 crash of Lion Air Flight 610 in the Java Sea, which killed 189 people, and the March 2019 crash of Ethiopian Airlines Flight 302, which killed 157.

What followed was an unprecedented 20-month global grounding of the jets, multiple investigations targeting Boeing’s missteps in the jet’s development and the Federal Aviation Administration’s oversight lapses, and scores of lawsuits from crash victims’ families, shareholders, airline customers and others accusing Boeing of shortcutting safety in its pursuit of profits. The FAA in November 2020 cleared the 737 Max to return to service.

Seafarers launched this suit in December 2019, and Boeing invoked its forum bylaw to get the action dismissed. The Seventh Circuit heard oral arguments in November 2020. The panel’s majority said Friday that the bylaw completely eliminates shareholders’ right to assert derivative claims under the Securities Exchange Act, in violation of Congress’ mandate that federal courts retain exclusive jurisdiction over those claims.

. . .

Seafarers’ attorney Carol V. Gilden of Cohen Milstein Sellers & Toll PLLC said in a statement to Law360 on Monday that they are eager to present their arguments in federal court.

“We are pleased with the Seventh Circuit’s thorough and well-reasoned opinion. We look forward to proceeding with the litigation of the Seafarers derivative 14(a) claims,” Gilden said.

Seafarers Pension Plan is represented by Carol V. Gilden, Richard A. Speirs, Amy Miller, and Steven J. Toll of Cohen Milstein Sellers & Toll PLLC.

Read Split 7th Circ. Says Boeing Can’t Curb 737 Max Derivative Suit.