Derivative Claims Dismissed for Failure to Plead Sufficient Facts

Claims for breach of fiduciary duty against directors for injury to a Delaware corporation caused by director misconduct are assets of the corporation. In deference to the director-centric model of corporate decision-making embodied in Delaware law, a stockholder may not obtain control over that corporate asset without first making a demand on the board to bring an action or pleading that demand is excused. When a stockholder plaintiff believes that demand is excused but fails first under Section 220 of the Delaware General Corporation Law to seek books and records related to alleged misconduct in a transaction, that plaintiff will need to allege with particularity, and without discovery or pertinent books and records, either that a majority of the board was not disinterested or independent or that the decision to enter into the transaction was not otherwise the product of a valid exercise of business judgment. As the recent case of In re Sanchez Energy Derivative Litigation, Con. C. A. No. 9132-VCG (Del. Ch. Nov. 25, 2014), illustrates, conclusory allegations of personal or financial ties will not suffice to challenge the independence of a board majority and a plaintiff can rarely plead that a transaction was so egregious that no rational board could have approved it, resulting, as occurred in Sanchez, in dismissal of plaintiff’s derivative claims.

Background

At issue in Sanchez was a related-party transaction where Sanchez Energy Corp. allegedly overpaid to acquire an undivided one-half working interest in 40,000 acres in developed land and 40,000 acres of undeveloped land held by Sanchez Resources LLC in a Tuscaloosa Marine Shale project. A.R. Sanchez Jr. was a 16 percent stockholder and A.R. Sanchez III was a 5.5 percent stockholder of Sanchez Energy. Sanchez Resources was allegedly a privately held affiliate of Sanchez Energy that was managed by Sanchez Oil & Gas Corp., another Sanchez-family-controlled entity that provided services to all Sanchez-affiliated entities. The plaintiffs alleged that Sanchez Energy’s $77 million payment valued the transaction at 17 times a comparable arm’s-length transaction in August 2013. The plaintiffs alleged as well that Sanchez Energy paid $2,500 per acre for the same working interests that Sanchez Resources had purchased in 2010, prior to development, at $184 per acre.