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Court Of Chancery Explains Domination Law

New Jersey Carpenters Pension Fund v. Infogroup, Inc., C.A. 5344-VCN (September 30, 2011)

To decide whether a derivative suit may proceed without first asking the Board of Directors to bring the suit, one test that is applied is whether the Board is "dominated or controlled" by an alleged wrongdoer.  For if the Board is so dominated, then it cannot be expected to independently decide if the suit should proceed.  Some cases under this rule are easy to decide, such as when there is a parent-child relationship involved.  [Those of us who have had teenagers might wonder why this is so.]

There are harder cases and this is one. Here the Court decided that the threats of a dominant stockholder and board member had so affected the rest of the Board that the other directors could not be expected to independently decide if the dominating board member should be sued. Hence, it permitted the suit to proceed without a demand on the rest of the Board.

The obvious lesson here is not to be a bully.

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