Court of Chancery Dismisses Derivative Action for Failure to Plead Demand Futility

A cardinal principle of Delaware law is that directors manage the business and affairs of a Delaware corporation. This includes decisions regarding whether to pursue claims against officers and directors whose breach of duty may have injured the company. A stockholder who believes that the board is not pursuing claims of wrongdoing that harmed the company must first demand that the board investigate or pursue those claims so that the board has an opportunity to exhaust intra-corporate remedies.

It is only if the stockholder believes that demand would be futile that the stockholder can skip that step and file a derivative claim on behalf of the corporation. In that circumstance the stockholder must plead adequately why demand would have been futile or have the action dismissed for failure to do so. Lenois v. Lukman, C. A. No. 11963-VCMR (Del. Ch. Nov. 7) is the most recent guidance from the court on the topic of demand futility and the case illustrates, among other things, that the mere fact that one officer or director may have acted in bad faith does not suffice to excuse demand if the plaintiff is unable to plead particularized facts demonstrating that a majority of the board could not act impartially upon a stockholder demand. Where a company has an exculpatory provision in its charter under Section 102(b)(7) that means a plaintiff must plead facts showing that a majority of the board faces a risk of liability for claims not otherwise exculpated, i.e., claims for violation of the duty of loyalty or for not acting in good faith.

Background