Chancery Describes Standard of Review for Demand Refusal Decision

On May 8, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery issued an opinion clarifying the standard of review applicable to a board of directors’ decision to refuse a stockholder demand to bring litigation on behalf of the corporation. In Ironworkers District Council of Philadelphia & Vicinity Retirement & Pension Plan v. Andreotti, C.A. No.9714-VCG (Del. Ch. May 8, 2015), the court granted a motion to dismiss a stockholder complaint alleging the board of DuPont improperly refused a stockholder demand to sue certain DuPont officers and directors for breaches of fiduciary duties related to the company’s high-stakes patent infringement dispute with Monsanto. The court reviewed the board’s decision not to pursue the claims under the business judgment standard, stating that the relevant question is whether the board, in declining the stockholder demand, “was grossly negligent in failing to inform itself, or intentionally acted in disregard of the company’s best interests.”

The Ironworkers plaintiff’s demand related to DuPont’s attempts to develop a genetically modified seed technology that could compete with Monsanto’s “Roundup Ready” technology between 2006 and 2012. DuPont had access to Roundup Ready pursuant to a licensing agreement with Monsanto, which prohibited commercialization of any product that combined a competitor technology with Roundup Ready. After attempts to develop a standalone competitor technology proved disappointing, DuPont began development of a product that combined the DuPont technology with Roundup Ready. Although Monsanto and certain of DuPont’s employees expressed concern that commercialization of the product would violate the licensing agreement, development continued, and in 2009, Monsanto sued DuPont in federal district court alleging breach of the licensing agreement and patent infringement. In 2012, the court ruled in Monsanto’s favor, and the parties ultimately settled in 2013, with DuPont agreeing to pay Monsanto $1.75 billion. The litigation also resulted in sanctions against DuPont based on the court’s finding that it had litigated in bad faith. Following the litigation, which the court described as “disastrous” for DuPont, the Ironworkers plaintiff and other DuPont stockholders made demands on DuPont’s board to investigate and consider suit against certain of the company’s officers and directors for breaches of fiduciary duties related to the development of the products and the Monsanto lawsuit.