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Chancery Permits Novel Breach of Fiduciary Duty Claim Against Directors Who Refused Demand

Garfield v. Allen, C.A. No. 2021-0420-JTL (Del. Ch. May 24, 2022)
Historically, the wrongful rejection of a demand has affected only the question of who controls a derivative claim.  In this case, involving equity issuances to a director under an equity compensation plan, however, the plaintiff asserted that defendant-directors’ demand refusal constituted a separate breach of duty because the defendants did not correct an obvious violation of the plan’s plain language.  Although the Court recognized that the claim was potentially problematic from a policy perspective, the Court nonetheless found that the claim rested on the established principle that a conscious failure to act is the equivalent of action.  And the Court concluded that the plaintiff’s complaint established “one of the strongest possible scenarios for such a claim.”  Thus, the Court reasoned, it was reasonably conceivable that the defendants’ conscious inaction in the face of the plaintiff’s demand constituted a breach of the defendants’ duties.  



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