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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Follows Recent Precedent Finding Pre-Suit Correspondence to be a Litigation Demand, Dismisses Derivative Complaint for Failure to Allege Wrongful Refusal
Incorporating the analysis set forth in Solak ex rel Ultragenyx Pharmaceutical, Inc. v. Welch, 2019 WL 5588877 (Del. Ch. Oct. 30, 2019), the Court of Chancery again dismissed a derivative complaint under Rule 23.1 after finding that the plaintiffs’ pre-suit correspondence was a litigation demand.
Here, stockholder-plaintiffs brought suit challenging director compensation at RR Donnelley & Sons. They attempted to allege that a demand upon the board would be futile. The defendants moved to dismiss under Rule 23.1. They argued that the plaintiffs had in fact made a litigation demand and failed to allege that their demand was wrongfully refused. As it had recently in Ultragenyx – which held that a nearly identical letter from the same law firm was a litigation demand – the Court applied the standard from Yaw v. Talley, 1994 WL 89019 (Del. Ch. Mar. 2, 1994), which looks to whether the communication at-issue indicates (i) the alleged wrongdoers; (ii) the alleged wrong and corresponding corporate injury; and (iii) the legal action the shareholder wants the board to take. The parties’ dispute focused on whether the third factor was satisfied. The plaintiffs stressed that the letter did not expressly demand that the board initiate litigation and that it included a disclaimer indicating it should not be considered a litigation demand. The Court found, however, that the third factor was satisfied because the letter contained strong overtures of litigation, demanded immediate remedial measures, indicated that the company was vulnerable to shareholder challenges, and stated that the plaintiff-shareholders would “consider all available shareholder remedies” absent satisfactory corrective action. The Court also noted that, because the plaintiffs’ subsequent complaint was “nearly a carbon copy” of the letter, and because the remedial measures sought in the letter aligned with the benefits commonly achieved in derivative lawsuits, these considerations also supported that the letter was a litigation demand. The Court further reasoned that the plaintiffs could not benefit from precedent holding that ambiguous pre-suit communications should not be held to be litigation demands because the plaintiffs appeared engaged in “tactical wordsmithing intended to exploit the plaintiff-friendly presumption.”