Delaware Business Litigation Report

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. 

The Court found that the allegations in the complaint failed to raise a reasonable doubt about the disinterestedness or independence of at least half of the board. There were no particularized allegations that any of the directors had a personal material self-interest in, or lacked independence regarding, the alleged decision to reject the offer. Nor did the complaint adequately allege that at least half of the director defendants could be found to have acted in bad faith and face a substantial likelihood of liability. Rather than the decision being inexplicable on grounds other than bad faith, the complaint alleged that the director-defendants had a longstanding turnaround plan, about which they were optimistic. Rejecting the notion that the plaintiff’s allegations that defendants implemented defensive measures triggering Unocal scrutiny amounted to “a per se determination that the transaction is inexplicable other than by bad faith,” the Court dismissed the complaint for failure to satisfy Rule 23.1.

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