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.
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