Posts in Demand Futility

Chancery Dismisses Derivative Claims That Private Equity Sponsors Comprised A Control Group

Patel v. Duncan, C.A. No. 2020-0418-MTZ (Del. Ch. Sept. 30, 2021)
For stockholders to comprise a control group, the alleged group members must be connected in some “legally significant way – such as by contract, common ownership, agreement or another arrangement – to work together toward a shared goal.” Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251-52 (Del. 2019). There must be “an indication of an actual agreement, although it need not be formal or written.” Id. Here, the court dismissed a claim alleging that two private equity funds comprised a control group that agreed to cause the corporation to engage in two unfair, self-interested transactions as a quid pro quo arrangement between them. Specifically, the plaintiff alleged they agreed to cause the corporation to overpay in two successive transactions in which the counterparties who benefitted unfairly were affiliates of the respective private equity funds.  More ›

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Chancery Examines Cornerstone Standard for Establishing Non-Exculpated Fiduciary Duty Claims

In Re BGC Partners, Inc. Derivative Litigation, Consol. C.A. No. 2018-0722-LWW (Del. Ch. Sep. 20, 2021)
A director protected by an exculpatory provision is entitled to dismissal in a breach of fiduciary duty action unless the plaintiff advances a non-exculpated claim. Under In re Cornerstone Therapeutics Inc. Shareholder Litigation, 115 A.3d 1173 (Del. 2015), to establish a non-exculpated claim plaintiff must show that a director: (1) “harbored self-interest adverse to the stockholders’ interests”; (2) “acted to advance the self-interest of an interested party from whom they could not be presumed to act independently”; or (3) “acted in bad faith.” This decision explains Cornerstone’s second prong. More ›

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Chancery Dismisses Derivative Claims Alleging Insider Trading and Misleading Disclosures for Failure to Plead Demand Futility

In re Zimmer Biomet Hldgs., Inc. Deriv. Litig., C.A. No. 2019-0455-LWW (Del. Ch. Aug. 25, 2021)
Under Court of Chancery Rule 23.1, a stockholder-plaintiff may only bring a derivative suit on behalf of a company if the plaintiff (i) first makes a demand on the board to bring suit and is wrongfully refused, or (ii) adequately pleads that a demand would have been futile because the directors were incapable of impartially considering it. Here, the court granted the defendants’ motion to dismiss, because the stockholder-plaintiff failed to allege facts that a majority of the board of directors – who concededly were otherwise disinterested and independent – faced a substantial risk of personal liability. More ›

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Chancery Reasons That Board’s Decision To Address Alleged “Red Flags” Related To Pending Litigation, After Litigation Is Resolved, Is Not Bad Faith For Caremark Purposes

Pettry v. Smith et al., C.A. No. 2019-0796-JRS (Del. Ch. June 28, 2021)
As discussed in Caremark and its progeny, fiduciary duties require directors to monitor the business and affairs of a corporation. Here, the Court of Chancery addressed the issue of oversight liability in the context of a Board’s decision, despite “red flags,” to delay certain additional remedial actions pending resolution of directly related litigation. More ›

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Chancery Rejects Plaintiff’s Attempt to Recharacterize Pre-Suit Demands

The Raj & Sonal Abhyanker Fam. Tr. v. Blake, C.A. No. 2020-0521-KSJM (June 17, 2021)
Court of Chancery Rule 23.1 presents a would-be derivative plaintiff with two exclusive options: make a pre-suit demand on the board to bring the claims at issue, or bring the claims and plead demand futility. A stockholder who elects to make a demand on the board may challenge whether the board wrongly refused the demand, but the stockholder cannot later bring suit and allege demand futility. And, as this case shows, the Court of Chancery will scrutinize a stockholder’s attempt to circumvent this restriction. More ›

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Chancery Confirms the Challenges in Pleading Caremark and Non-Shareholder Action Disclosure Claims

Fisher v. Sanborn, C.A. No. 2019-0631-AGB (Del. Ch. Mar. 30, 2021)
Under Court of Chancery Rule 23.1, a plaintiff attempting to bring a derivative action on behalf of a corporation faces a heightened “particularized” pleading standard. This pleading challenge is compounded when a plaintiff attempts to bring a Caremark failure of oversight claim – “possibly the most difficult theory in corporate law.” Similarly, a plaintiff alleging false or misleading disclosures not made in connection with soliciting shareholder action faces the additional pleading challenge of demonstrating that those disclosures were knowing or deliberate. More ›

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Plaintiff’s Failure to Plead Demand Futility Leads to Dismissal of Caremark Claims Against MoneyGram Directors

Richardson v. Clark, C.A. No. 2019-1015-SG (Del. Ch. Dec. 31, 2020)
Under Court of Chancery Rule 23.1, a derivative plaintiff’s must make a demand on the corporation’s board of directors unless the plaintiff can plead particular facts to establish that demand was excused. Although demand may be excused where a majority of the board faces a substantial likelihood of personal liability, merely alleging wrongdoing by the corporation’s directors will not suffice. More ›

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Chancery Dismisses Derivative Action for Failure to Plead Demand Futility Despite Unocal Enhanced Scrutiny

Gottlieb v. Duskin, C.A. No. 2019-0639-MTZ (Del. Ch. Nov. 20, 2020)

Defendants moved to dismiss a derivative action for failure to plead demand futility under Rule 23.1. The complaint alleged that the director defendants had breached their fiduciary duties by engaging in a scheme to thwart an unsolicited offer to purchase the company at a premium. In a previous ruling, the Court found that the plaintiff had adequately pled facts that triggered Unocal enhanced scrutiny. Nonetheless, the Court held that, even with the application of Unocal scrutiny, the plaintiff failed to plead facts that would establish that demand was futile.  More ›

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Chancery Questions Utility of Aronson Test, Dismisses Derivative Suit of Facebook Stockholder for Failure To Allege Demand Futility

United Food and Comm. Workers Union v. Zuckerberg, C.A. No. 2018-0671-JTL (Del. Ch. Oct. 26, 2020)
In its recent decision in United Food and Comm. Workers Union v. Zuckerberg, the Court of Chancery discussed the legal tests to demonstrate demand futility in derivative actions under the seminal cases of Aronson and Rales. Reconciling longstanding and recent case law, the Court ruled that demand futility turns on whether at the time of filing of the complaint, the majority of a board of directors is disinterested, independent, and capable of impartially evaluating a litigation demand to bring suit on behalf of a company. More ›

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Chancery Compares Aronson and Rales Tests for Demand Futility; Finds Well-Pled Caremark Claim Showing No Good Faith Effort to Oversee Financial Reporting and Related-Party Transactions Made Demand Futile

Hughes v. Hu, C.A. No. 2019-0112-JTL (Del. Ch. Apr. 27, 2020).

Everyone from bar applicants to seasoned litigators and counsel advising boards of directors can find something of interest in Hughes v. Hu, which (i) provides a comprehensive review of how the Court of Chancery evaluates demand futility in derivative actions and (ii) discusses the type of allegations that will support a well-pled Caremark claim for failure to take affirmative steps to ensure an effective board-level monitoring reporting system is in place. More ›

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Chancery Dismisses GoPro Derivative Action for Failure to Allege Directors Intentionally Made Inflated Revenue Forecasts or Failed to Exercise Appropriate Caremark Oversight

In re GoPro, Inc. S’holder Deriv. Litig., C.A. No. 2018-0784-JRS (Del. Ch. Apr. 28, 2020)

This opinion serves as a reminder that particularized allegations of non-exculpated wrongdoing are necessary to support the contention that a demand would be futile. Vice Chancellor Joseph R. Slights, III dismissed a breach of fiduciary duty derivative action for failure to allege demand futility with the detail prescribed by Chancery Court Rule 23.1. The plaintiffs, GoPro, Inc. stockholders, filed suit against officers and directors after complications with the launch of a new drone caused the company to miss its revenue forecast. The complaint alleged that pre-suit demand was futile because a majority of the board faced liability for its knowledge of, but failure to disclose, the company’s revenue shortfall and were beholden to the CEO/controlling stockholder such that they could not exercise independence. The missed revenue projections also spurred a federal securities class action suit, naming three of the same defendants, where a ruling denying a dismissal motion found that the class plaintiffs well pled that the named overlapping defendants made false or misleading statements regarding the drone. More ›

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Chancery Provides Guidance on Rule 23.1 “With Particularity” Pleading Standard in Continuing Investors Bancorp Stock Awards and Options Dispute

Elburn v. Albanese, C.A. No. 2019-0774-JRS (Del. Ch. Apr. 21, 2020)

Finding that the stockholder plaintiff (the “Plaintiff”) had satisfied the Rule 23.1 “with particularity” pleading standard, the Court of Chancery declined to dismiss claims challenging an alleged quid pro quo arrangement between certain officers and the board of directors (the “Board”) at Investors Bancorp, Inc. (the “Company”) that had the effect of undoing and rendering meaningless the settlement (the “Settlement”) of a previous derivative action.  More ›

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Chancery Dismisses Claims Seeking to Compel a Dividend Declaration and for Breach of the Duty of Care

Buckley Family Trust v. McCleary, C.A. No. 2018-0903-AGB (Del. Ch. Mar. 31, 2020).

This case involved a minority stockholder in a Subchapter S corporation seeking relief as a result of its dissatisfaction with management’s operating performance and the company’s unwillingness to pay dividends, matters which defendants contended were well within the exercise of their business judgment. The Court of Chancery granted defendants’ motion to dismiss the complaint. More ›

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Chancery Finds “Constellation” of Personal and Professional Relations Between Directors and Controlling Stockholder Excuses Demand

In re BGC Partners, Inc. Derivative Litig., Consol. C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019).

A stockholder plaintiff seeking to bring a derivative claim on behalf of a corporation must first demand authorization from the board of directors or allege why making such a demand would be futile due to the board’s assumed partiality under the alleged facts and circumstances.  One way of establishing demand futility is alleging with particularity significant personal or professional ties to an interested party, like a conflicted controlling stockholder.  BGC Partners illustrates the type and degree of relationships that may excuse the pre-suit demand requirement and overcome a motion to dismiss under Court of Chancery Rule 23.1.  This is a developing area of Delaware law, arguably involving a heightened sensitivity to the significance of personal relationships.  As BGC Partners observes, the Delaware Supreme Court has reversed Court of Chancery findings of director independence in the demand futility context three times in the past four years. More ›

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