This is the old version of the H2O platform and is now read-only. This means you can view content but cannot create content. You can access the new platform at https://opencasebook.org. Thank you.
As we know, the corporate law places the board of directors in a central place with respect to the management of the corporation. Section 141(a) and its mandate that the board manage the business and affairs of the corporation extends naturally to control over any legal claims that the corporation may have. Claims of the corporation against third parties are relatively simple to deal with. Stockholders have little reason to worry that a board might not pursue claims against third parties. Legal claims against the corporation's own board of directors or the corporation's own agents, on the other hand, are more troublesome.
It may not be realistic to expect the board to pursue potential legal claims owned by the corporation against themselves. The derivative action permits stockholders in certain circumstances to stand in the shoes of the corporation to vindicate rights of the corporation that its own directors will not pursue.
The ability of stockholders to take up litigation on behalf of the corporation is not unlimited.
In order to preserve the central importance of the board in the management of the corporation, courts will require shareholders who wish to sue on behalf the corporation to jump through certain procedural hoops.
Consequently, procedure plays an extremely important role in derivative litigation. This section provides an overview to procedural requirements in derivative cases. In particular, Rule 23.1 requires that in any complaint, a statement that the stockholder made a “demand” to the corporation or if they did not why such a demand would have been “futile”. Many cases will be resolved on a Rule 23.1 Motion to Dismiss for failure of the stockholder to make a demand when a demand was required.EDIT PLAYLIST INFORMATION DELETE PLAYLIST
Edit playlist item notes below to have a mix of public & private notes, or:MAKE ALL NOTES PUBLIC (8/8 playlist item notes are public) MAKE ALL NOTES PRIVATE (0/8 playlist item notes are private)
|1||Show/Hide More||Aronson v. Lewis|
Because derivative litigation is properly litigation that “belongs” to the corporation, stockholders bringing derivative litigation should be the exception rather than the rule. The requirement that a stockholder make a demand on the board prior to bringing derivative litigation is a recognition of this fact.
The court in Aronson lays out one test for determining whether a plaintiff in a derivative suit will be relieved of the “demand” requirement. If making a demand on the board would be “futile”, a stockholder plaintiff will be free to bring a derivative claim on behalf of the corporation without first asking the board to take action. In order to establish that demand is futile under Rule 23.1 and the Aronson test, plaintiffs must allege sufficient facts in the complaint as to call into question the business judgment presumption.
|2||Show/Hide More||Rales v. Blasband|
In Rales, the court announces a second, alternative, test for demand futility. The focus on the inquiry under the Aronson test is the challenged transaction and questions the interestedness and independence of directors with respect to the challenged transaction. In Rales the court's focus of analysis is different because Rales is applied in circumstances where there is no particular transaction to challenge. Rather, the focus of the analysis is on whether board would be able to fairly consider the stockholder's demand had it been made.
The claim here involves a “double derivative suit.” In a double derivative suit, stockholders of a parent corporation bring suit against the parent of a wholly-owned subsidiary on behalf of the subsidiary corporation.
Notice that this case is presented as a certified question. The Delaware Supreme Court is one of the very few state supreme courts in the country that accepts certified questions. It often does so to resolve novel questions of the Delaware corporate law that arise before other courts. In Rales, the question presented to the Delaware Supreme Court was raised by a US federal district court.
|3||Show/Hide More||Guttman v. Huang|
|4||Show/Hide More||Beam v. Stewart|
Beam is a ruling on a defendant's 23.1 motion to dismiss. In the 23.1 motion, the defendants are arguing that demand was not futile under the relevant test (Rales in this case), and plaintiffs should have properly made demand. Plaintiffs argue that they didn't make demand because doing so would have been futile because of the board's lack of independence from Martha Stewart and the fact that Stewart was interested in the transaction.
The Chancery Court articulated the standard at issue here in the following way:
“Because this claim does not challenge an action of the board of directors of MSO, the appropriate test for demand futility is that articulated in Rales v. Blasband. Particularly, the Court's task is to evaluate whether the particularized allegations “create a reasonable doubt that, as of the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” Rales requires that a majority of the board be able to consider and appropriately to respond to a demand “free of personal financial interest and improper extraneous influences.” Demand is excused as futile if the Court finds there is “a reasonable doubt that a majority of the Board would be disinterested or independent in making a decision on demand.”"
It is important to your understanding of Beam to remember that when the court approaches the question of interestedness and independence of the board in a 23.1 motion to dismiss, the board enjoys the benefit of the business judgment presumption. That means the plaintiff in its pleadings must allege facts to overcome that presumption. Mere statements that board members are either interested or not independent will not be sufficient to establish demand futility.
|5||Show/Hide More||Shoen v. SAC Holding Corp.|
|6||Show/Hide More||Spiegel v. Buntrock - Wrongful refusal of demand|
If a board receives and then refuses demand, the stockholder may not bring a derivative claim on behalf of the corporation. Of course, if a board could just refuse demand without regard to the merits of the demand, the demand requirement would devolve into a toothless exercise. Consequently, when a board refuses demand, the good faith and reasonableness of the board's refusal may still be examined by the courts.
However, a board's decision to refuse demand is a business decision, like any other. As a result, such decisions receive the protection of the business judgment presumption. In challenging a demand refusal, a stockholder will have to plead particularized facts with respect to the board's decision to refuse demand as to overcome the business judgment presumption.
|7||Show/Hide More||Brehm v. Eisner|
|8||Show/Hide More||In Re The Goldman Sachs Group, Inc. Shareholder Litigation|
In the case that follows, the Chancery Court considers the defendant's Rule 23.1 motion to dismiss. In a 23.1 motion, the defendant argues that the complaint should be dismissed for lack of standing. The defendant argues that the plaintiff lacks standing because it did not comply with the requirements of 23.1, typically failure to make demand when demand is not futile.
As is required in such cases, in the Goldman case the court reviews the interestedness and independence of each director in order to determine whether demand was futile. However in this particular case, the court applies both Aronson and Rales.
Brian JM Quinn
This is the old version of the H2O platform and is now read-only. This means you can view content but cannot create content. If you would like access to the new version of the H2O platform and have not already been contacted by a member of our team, please contact us at firstname.lastname@example.org. Thank you.