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Court Of Chancery Examines Whether Derivative Demand Was Wrongfully Refused

Zucker v. Hassell, C.A. 11625-VCG (November 30, 2016) and Kops v. Hassell, C.A. 11982-VCG (November 30, 2016)

Even after a board rejects a plaintiff-stockholder’s demand to bring a derivative litigation, the plaintiff may proceed to bring that derivative action if the plaintiff can show the refusal was “wrongful.”  Having conceded that the directors were not “interested” in the subject of the demand by making the demand rather than suing and trying to allege demand futility, the plaintiff must show that the decision to refuse the demand was a bad faith breach of the duty of loyalty, or a grossly negligent breach of the duty of care.  These two related decisions examine whether plaintiffs met the high bar of sufficiently alleging wrongful refusal.  They illustrate, for instance, how it might not be enough that an investigation proved wrong, or that the company subsequently agreed to a large settlement arising out of the investigated events.