About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 153 posts in Derivative Claims.
Delaware law requires a derivative plaintiff to make a pre-suit demand on the board unless excused as futile. Because some level of social and business ties are common among the director-class and because such ties to an interested party is one potential path to successfully alleging a director lacks independence to impartially consider a pre-suit demand, such relationships are an oft litigated topic in the demand context. Frequently, such connections even when considered collectively are found not to rise to a level negating a director’s ability to consider a demand. But, as this decision explains, sometimes they are. While each director-by-director assessment is a highly-factual question, this case is a worthwhile read to understand the type and magnitude of relationships that might call into doubt one’s independence.
Demand on directors is not required when it is alleged that they have violated a statute or rule. But when the claim is only that they violated the "best practices” suggested by an agency, that is not enough to excuse demand on the board.
This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware. This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court. More ›
This decision explains again that actual or constructive knowledge of persistent corporate wrongdoing is needed before there is a substantial likelihood the directors may be liable and thus demand is excused. The Chief Justice's modest dissent points out that the facts are not fully developed at the motion to dismiss stage and he thought the complaint was good enough to warrant further discovery. This points out a potential problem in Delaware law. It will be a rare case where the board of director minutes provide clear notice of bad corporate conduct without some sort of corrective measure also promised. How sincere those promises are is hard to gauge just based on the minutes. Hence, pleading a case good enough to survive a motion to dismiss is getting harder.
This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›
This case illustrates the power of well-functioning special committee to diffuse the potentially corruptive influence of a self-interested controller on a transaction. The result of a well-functioning special committee in this case was that the derivative plaintiff was unable to get around the pre-suit demand on the board requirement. Applying the second prong of the Aronson test for demand futility, the Court interpreted that portion of the test to require the plaintiff sufficiently allege that a majority of the board faces a substantial likelihood of liability for non-exculpated claims. In other words, that a non-exculpated claim may be brought against less than a majority of the board or some other individual at the company, or that the board committed exculpated duty of care violations, will not alone prove demand futility.
Derivative plaintiffs alleging that directors allowed the corporation they serve to violate the law typically face dismissal for failure to make pre-suit demand on the board unless they allege a bad faith breach of the fiduciary duty of loyalty. To survive dismissal, plaintiffs need to sufficiently allege the directors knowingly cause the violation or knowingly failed to act—a very high bar. This decision explains that a knowing violation may be found, as it was here (at the motion to dismiss stage), when the law in question is clear and the illegal corporate practice in question is well known to the board.
This is a rare case involving apparent lack of care in approving a conflicted transaction and a failure to employ almost any safeguards to ensure fairness. It is worth reading just to see what not to do, particularly when dealing with a very significant business decision to the particular company.
This is an important decision holding that just because one derivative litigation was dismissed for failure to overcome the requirement of pre-suit demand on the board, it does not mean a similar derivative suit must be dismissed on the same grounds. Instead, under the rule advocated for in this decision, an earlier dismissal only affects the second suit if the first suit was dismissed after the plaintiff survived a demand futility motion or the board conceded that demand is excused. It is at that point which the plaintiff in the first suit was acting on the company’s behalf and its actions may bind other plaintiffs. Originally stated as dicta in the EZCORP decision, this rule, among other things, prevents ill-prepared and typically rushed derivative complaints from cutting off better prepared complaints. Previously, before a remand in this action, the Court had applied a rule that examined the “adequacy of representation” provided by the plaintiffs in the first suit. This “grossly deficient” representation standard generally favored defendants and made dismissal likely in the second suit. It remains to be seen whether the Delaware Supreme Court will adopt the EZCORP rule as endorsed by Wal-Mart.
A derivative plaintiff who fails to make a pre-suit demand on the board must show why demand is excused using particularized facts. Here, the plaintiff argued that demand was automatically excused by sufficiently pleading a Unocal claim. Some prior case law supports that argument, but the Court in this case rejected an automatic demand excused rule. Instead, the Court used the more traditional analysis that required either allegations of self-interest or sufficiently egregious conduct that showed bad faith. Allegations that the board was motivated by a desire to maintain their positions were not sufficient where the complaint lacked facts showing that keeping their jobs was material to each of them. Similarly, a decision to adopt an entrenchment device is not alone bad faith.
Under the well-known Brinckerhoff decision, a claim may be both a direct claim and a derivative claim. When that occurs the complaint need not comply with Rule 32.1 demand requirements. This decision points out that Brinckerhoff is very limited and only claims that involve a dilution of voting rights may be considered dual claims.
This is an interesting decision because it applies the rules for determining when a derivative plaintiff, in the LLC context, has sufficiently alleged that pre-suit demand on the board would have been futile. More ›
This decision explains what “costs” are recoverable under Court of Chancery Rule 54 following a successful appeal. While the amounts involved normally do not merit much discussion, the cost of bond for an appeal can be significant when the court below awards a large judgment, like in this case. As this decision points out, the circumstances surrounding the posting of the bond may determine whether or not it was a “necessary” and therefore recoverable cost.
Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion
When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.
At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.