Demand Futility – Delaware Docket

FACEBOOK ESCAPES SHAREHOLDER DERIVATIVE SUIT AS COURT QUESTIONS VALIDITY OF ARONSON AND FINDS PLAINTIFF FAILED TO SUPPORT CLAIMS OF DEMAND FUTILITY

Oct 15 2021

In United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., C.A. No. 2018-0671 (Del. Ch. Oct. 26, 2020), the Delaware Court of Chancery (the “Court”) dismissed a derivative suit brought by the stockholders (the “Plaintiffs”) of Facebook, Inc. (“Facebook”) because the Plaintiffs failed to adequately plead demand futility under Court of Chancery Rule 23.1. The derivative suit accused members of the Facebook board of directors (the “Board”) and Facebook CEO, Mark Zuckerberg, of breaching their fiduciary duties of care and loyalty by pursing and approving a stock reclassification proposal that would have allowed Zuckerberg to retain voting control of Facebook while donating a significant portion of his common stock to charitable causes. The Court discussed the two primary tests for determining demand futility in derivate actions – Aronson and Rales – and determined that demand futility turns on whether, at the time of filing the complaint, the majority of a board of directors is disinterested, independent, and capable of impartially evaluating a litigation demand to bring suit on behalf of a company.

Chancery Court Declines to Dismiss Derivative Claims for Audit Committee Oversight Failure and Unjust Enrichment

Jun 02 2020

By: Remsen Kinne and Michael C. Payant

In William Hughes, Jr. v. Xiaoming Hu, et al., C.A. No. 2019-0112-JTL (Del. Ch. April 27, 2020), the Delaware Court of Chancery (the “Court”) held that stockholder plaintiff’s failure to make a demand on the board of directors (the “Board”) was excused and therefore denied defendants’ motions to dismiss under Court of Chancery Rules 23.1 and 12(b)(6) derivative claims brought by plaintiff on behalf of Kandi Technologies Group, Inc., a public Delaware corporation based in China (the “Company”). The derivative claims alleged that the Board, acting through its Audit Committee (the “Committee”), breached fiduciary duties by failing to implement effective oversight of the Company’s disclosure and financial information reporting controls and procedures and that as a result Company officers were unjustly enriched.

Derivative Suit Dismissed for Failing to Plead Demand Futility

May 13 2020

By: Rem Kinne and Zack Sager

In Shabbouei v. Potdevin, C.A. No. 2018-0847-JRS (Del. Ch. Apr. 2, 2020), the Delaware Court of Chancery dismissed a derivative suit against the board of directors (the “Board”) of lululemon athletica inc. (the “Company”) by a Company stockholder (“Plaintiff”) for failing to plead demand futility. The Court held that Plaintiff did not plead with the requisite particularity that the Board was self-interested in a Separation Agreement with the Company’s CEO Laurent Potdevin (“Potdevin”) negotiated by the Board and that the Board’s decision to settle with, instead of firing, Potdevin for cause was outside the bounds of proper business judgment.

Delaware Court of Chancery Interprets “Sufficient Particularity” Pleading Standard Under Rule 23.1

May 11 2020

By Annette E. Becker and Frank J. Mazzucco

In Robert Elburn v. Robert Albanese et al. and Investors Bancorp, Inc.,C.A. No. 2019-0774-JRS (Del. Ch. Apr. 21, 2020), defendants moved to dismiss a complaint under Court of Chancery Rules 12(b)(6) and 23.1 for failure to state viable claims and failure to plead demand futility. The Delaware Court of Chancery (the “Court”) interpreted the “sufficient particularity” pleading standard under Rule 23.1, noting that demand futility was pled with sufficient particularity to raise doubt that the board of directors could act impartially in response to a litigation demand.

COURT OF CHANCERY DISMISSES EXCESSIVE PAY CLAIMS

May 05 2020

By: Scott Waxman and Claire Suni

In Dahle et al. v. Pope et al., C.A. No. 2019-0136-SG (Del. Ch. 2020), the Delaware Court of Chancery (the “Court”) dismissed a derivative suit by stockholders of R.R. Donnelly & Sons Company (the “Company”) under Delaware Chancery Rule 23.1 (“Rule 23.1”) alleging excessive pay of the Company’s board of directors (the “Board’). The Court found that a letter from the stockholders (the “Letter”) to the Board constituted a pre-suit litigation demand that had been rejected by the Board, and as a result, Plaintiffs’ claim was not entitled to proceed derivatively under Delaware law. {Hard Return}

Court of Chancery Holds That Sole, Conflicted General Partner Cannot, By Reason of its Conflict, Delegate its Otherwise Valid Power to Manage Derivative Litigation

Apr 24 2020

By: Scott Waxman and Tami Mack

In Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Del. Ch. August 28, 2019), the Court of Chancery held that Blue Bell Creameries, Inc., the sole general partner (the “General Partner”) of Blue Bell Creameries, LP (the “Partnership”), was not a disinterested entity such that it could delegate its otherwise valid power to manage derivative litigation. The Court also held that it was not appropriate to undertake a conflict analysis with respect to the individual members of the board of directors of the General Partner (the “GP Board”), because such analysis would disregard the established policy of respecting the legal fiction of the business entity.

Stockholder Letter Requesting Remedial Action Deemed a Pre-Suit Demand

Dec 20 2019

By: Joanna Diakos Kordalis and Zack Sager

In Solak v. Welch, the Court of Chancery found that a letter from a stockholder to the board of directors, which requested remedial action to address allegedly excessive non-employee director compensation, was a pre-suit demand and dismissed the stockholder’s complaint for failing to allege wrongful demand refusal.

Chancery Court Dismisses Uber Derivative Suit for Failure to Make Demand or Plead Demand Futility

Oct 23 2019

By Annette Becker and Will Smith

In McElrath v. Kalanick, C.A. No. 2017-0888-SG (Ch. Del. April 1, 2019), the Delaware Court of Chancery (the “Court”) dismissed a derivative suit brought by a stockholder of Uber Technologies, Inc. (“Uber”) for damages arising from its acquisition of Ottomotto, LLC (“Otto”), an autonomous vehicle technology company. Plaintiff did not make demand on the defendant board of directors of Uber (the “Board”) for action prior to pursuing litigation. The Court dismissed the derivative suit finding that a majority of the Board that would have evaluated a demand was disinterested and independent, and therefore, had plaintiff made demand of the Board, such a demand would not have been futile.

Failure to Make Demand on Board Prior to Commencing Derivative Action Not Excused When Plaintiff Did Not Demonstrate that Demand Would Have Been Futile Because Directors Acted in Bad Faith by Knowingly Breaching their Oversight Responsibilities

Oct 22 2019

By: Eric E. Freedman and Serena M. Hamann

In Juan C. Rojas derivatively and on behalf of J.C. Penney Company, Inc. v. Marvin R. Ellison, et al, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019), the Delaware Court of Chancery dismissed with prejudice a derivative claim brought against J.C. Penney Company, Inc. (“J.C. Penney,” or the “Company”) and current and former members of the Company’s board of directors (the “Board”), on the grounds that the failure of plaintiff Juan Rojas (“Rojas”) to make a demand on the Board prior to filing suit did not satisfy the requirements of Delaware law for excuse from the requirement to make such a demand. The Court held that Rojas had failed to allege facts from which the Court could reasonably infer that any of the Board members had acted in bad faith by knowingly failing to exercise their oversight responsibilities, and that Rojas therefore had not demonstrated that a demand on the Board would have been futile.

Director Independence and Demand Futility: A Holistic Inquiry of the Pleading

Oct 21 2019

By: Josh Gaul and Rich Minice

In In re BGC Partners, Inc. Derivative Litigation, Civil Action No. 2018-0722-AGB (Del. Ch. Sep. 30, 2019), the Delaware Court of Chancery denied motions to dismiss for (i) failure to establish demand futility and (ii) failure to state a claim for relief (the “Motions”) filed by nominal defendant BGC Partners, Inc. (“BGC”), its affiliates CF Group Management, Inc. (“CF”) and Cantor Fitzgerald L.P. (“Cantor”), Howard Lutnick, the CEO, Chairman of the Board, and controlling stockholder of BGC (“Lutnick”), and four “independent” members of the Board of Directors of BGC (the “Special Committee Defendants” and all of which, together, are the “Defendants”). In denying the Motions in this stockholder derivative litigation, the court primarily discussed and applied recent guidance from the Delaware Supreme Court on the Aronson test for demand futility. In re BGC Partners, Inc. puts controlling stockholders on notice that their professional and personal ties to board members may undermine the purported independence of those board members.

Catagory:Demand Futility