In the last year, Delaware courts have adapted familiar jurisprudence to new contexts, including a boom in special purpose acquisition companies (SPACs) and the COVID-19 pandemic. Recent decisions have addressed the showing stockholders must make to pursue derivative claims for breach of fiduciary duty on behalf of Delaware companies; reaffirmed that material adverse effect (MAE) clauses and ordinary course covenants provide little recourse to buyers seeking to terminate merger agreements due to post-signing events; and provided guidance to SPAC investors seeking to remedy disappointing investment returns. Understanding these developments in Delaware law is essential to boards’ prudent management of strategic and litigation risks this proxy season.

A Streamlined Test for Demand Futility in Derivative Cases

A stockholder seeking to bring a derivative action on behalf of the corporation must serve a pre-suit demand on the board or show demand would have been futile. For decades, Delaware courts employed two similar but distinct demand futility tests: one used where the directors who would have considered any litigation demand also approved the challenged corporate action and another used where plaintiff alleged that the board had failed to act or challenged a decision by a majority of directors no longer serving on the board. The distinction between the two tests proved difficult to apply, particularly where plaintiffs challenged a number of corporate actions (or omissions) over time and amid director turnover.

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