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The Delaware Supreme Judicial Court (SJC) June 27 upheld a Superior Court judge’s dismissal of a lawsuit brought by a policyholder against the board of directors of John Hancock Mutual Life Insurance Company. The SJC agreed with Essex Superior Court Judge Allan Van Gestel’s finding that the board’s actions were protected by the business judgment rule, which affords protection to the business decisions of company directors, provided the directors have no personal interest in the matter being decided. Although it reaffirmed the importance of the rule, the court created an exception to the related “shareholder demand requirement,” which states that in place of filing an individual action, a single shareholder must win the approval of the majority of shareholders to overturn the board’s decision. The case began after the State Attorney’s office and the State Ethics Commission accused F. William Sawyer, Hancock’s senior registered lobbyist, of unethical activities in relation to his lobbying of members of the Legislature. In response to the accusations, Hancock entered into a settlement agreement with the agencies, agreeing to pay $1 million in civil fines and to reorganize its government relations department. Hancock also reassigned Sawyer to a non-lobbying position. Unsatisfied with the agreement, Loretta M. Harhen, an individual policyholder, sent a letter to Hancock’s board of directors demanding they commence a suit against Sawyer. Harhen also asked that Hancock name Stephen Brown, Hancock’s chairman of the board and CEO; E. James Morton, Brown’s predecessor; and David F. D’Alessandro, senior executive vice president of Hancock’s retail sector, claiming they “knew or should have known” of Sawyer’s alleged activities. Harhen argued that the defendants had cost Hancock $4 million in legal fees and had damaged the company’s reputation. The board referred this demand to a committee of two directors, I. MacAllister Booth and Lawrence K. Fish, who opted not to institute a lawsuit. The SJC found that the actions of both Hancock’s board and the two-member committee were protected by the business judgment rule. To have her case go forward, the court said that Harhen would have had to prove that a majority of the board of directors had a personal interest in preventing the lawsuit from being filed. “The business judgment rule affords protection to the business decision of directors, including the decision to institute litigation, because directors are presumed to act in the best interest of the corporation,” wrote Justice Roderick L. Ireland for the court. “[A] disinterested board of directors that has refused a plaintiff’s pre-suit demand is entitled to the protection of the business judgment rule.” Harhen’s complaint alleged that three members of the board of directors had a personal interest in rejecting the lawsuit. The court, however, accepted the argument of Hancock’s attorneys, Jeffrey B. Rudman and Daniel P. Tighe, both of the Boston firm Hale and Dorr, LLP, who claimed that, because the board consists of 18 to 20 members, Harhen failed to establish that a majority of the board consisted of interested members. The court also held unsubstantiated the Harhen’s argument that Booth and Fish constituted interested parties, writing that no introduced evidence backed up the claim. Alan B. Morrison of the Public Citizens Litigation Group, and Jason B. Adkins of the Boston firm Adkins, Kelston &Zavez, represented Harhen. While the court found little merit to Harhen’s claim that her demand for litigation was improperly rejected, her case did cause the court to revise the shareholder demand requirement. In general, if a board of directors rejects a shareholder’s demand, the shareholder must present the demand to all other shareholders for a full vote in order to win the right to bring the case to court. Harhen argued that, when the number of shareholders is large, in Hancock’s case greater than 7 million persons, such a demand becomes impossibly burdensome. Although the SJC had not previously recognized such an exception to the requirement, the justices acknowledged the prudence in creating one. “To hold otherwise would place a tremendous financial and administrative burden on plaintiffs,” said the opinion. “[W]e conclude today that an exception to the shareholder demand requirement, where a very large number of shareholders is involved, as in this case, is eminently reasonable, and we therefore adopt such an exception.”

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