Shareholder Derivative Actions and Demand Futility
In his Corporate Litigation column, Joseph M. McLaughlin reviews a recent Delaware Chancery Court ruling that a decision made by a board committee composed of a minority of the board will not be evaluated as a decision of the full board for demand futility purposes. Consequently, in order to avoid dismissal, the shareholder must point to particularized allegations in its complaint raising reasonable doubt that a majority of the board could impartially consider a demand to sue.
August 12, 2015 at 04:22 PM
11 minute read
A cardinal precept of Delaware law is that directors, rather than shareholders, manage the business and affairs of the corporation. In the context of shareholder requests that the company pursue litigation, the decision whether to pursue litigation on behalf of the company generally resides with the board as an exercise of business judgment. A stockholder lacks standing to bring suit on the company's behalf unless the stockholder (i) has demanded that the directors pursue the corporate claim and the demand is wrongfully refused; or (ii) purports to initiate litigation on behalf of the company and alleges with particularity why pre-suit demand is excused as futile.
Delaware law features two tests to determine the sufficiency of a derivative complaint alleging demand futility. The applicable test depends on the composition of the board at the time of the complaint and whether a specific board decision is challenged. Known as the Rales test, where a putative derivative plaintiff chooses the demand futility path and no specific board decision is challenged, in order to avoid dismissal the shareholder must point to particularized allegations in its complaint raising reasonable doubt that a majority of the board could impartially consider a demand to sue.
Last month, Delaware Chancellor Andre G. Bouchard in Teamsters Union 25 Health Services & Insurance Plan v. Baiera held that a decision made by a board committee composed of a minority of the board will not be evaluated as a decision of the full board for demand futility purposes. Consequently, Delaware's Rales test, not the Aronson test applicable to a board decision, applies when evaluating whether it would be futile to make a demand on the board to pursue litigation challenging the committee's decision.1Baiera also illustrates that the plaintiff's challenges in establishing demand futility are not lessened merely by challenging a related party transaction with a large equity stakeholder.
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Trending Stories
- 1The Law Firm Disrupted: For Big Law Names, Shorter is Sweeter
- 2Wine, Dine and Grind (Through the Weekend): Summer Associates Thirst For Experience in 'Real Matters'
- 3'That's Disappointing': Only 11% of MDL Appointments Went to Attorneys of Color in 2023
- 4What We Know About the Kentucky Judge Killed in His Chambers
- 5'I'm Staying Everything': Texas Bankruptcy Judge Halts Talc Trials Against J&J
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250