In Steinberg v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018), the Delaware Chancery Court considered whether the Aronson or Rales test for demand futility should apply to a derivative claim for breach of fiduciary duty against directors who allegedly made false and misleading statements. After concluding that the plaintiff had failed to plead that a majority of the board had acted improperly, Chancellor Andre G. Bouchard applied Rales and granted defendants’ motion to dismiss under Rule 23.1 for failure to make a demand on the board.

The plaintiff was an individual stockholder of Hortonworks Inc., an enterprise software firm. The plaintiff derivatively alleged that Hortonworks’ seven directors, including the CEO, as well as its nondirector CFO, had breached their fiduciary duties in making four purportedly false or misleading statements about the sufficiency of the company’s cash position. Two of the statements were identical and appeared in Hortonworks’ Form 10-Q disclosures in the latter half of 2015. The other two—essentially that the company was “comfortable” with its cash position—supposedly were made by the company’s CEO on earnings calls in November and December 2015. On Jan. 15, 2016, Hortonworks announced a secondary public offering to raise cash in the marketplace, and on “the first trading day after the announcement, the company’s stock closed down 37 percent, falling from $16.57 per share to $10.44 per share.”

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