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Lewis H. Lazarus of Morris James. Lewis H. Lazarus of Morris James.

The Delaware Court of Chancery is often called upon to assess whether a plaintiff challenging an interested transaction who fails to make demand on the board to pursue claims based on alleged self-dealing or director interest can overcome the procedural hurdle of a motion to dismiss under Rules 23.1 and 12(b)(6). Case law has established that monetary interest alone is not the sole basis by which a director may be found to lack independence. For example, joint ownership of an airplane which requires substantial close cooperation in use reflective of “detailed planning indicative of a continuing, close personal friendship” may also suffice. Even if a plaintiff can allege sufficient particularized facts to demonstrate that demand would have been futile, a question may arise, if a majority of the disinterested directors (though less than a majority of the disinterested and independent directors) approves a transaction under Section 144(a)(1) of the Delaware General Corporation Law, whether the business judgment rule operates to prevent a plaintiff from having stated a cognizable claim. In Cumming v. Edens, C.A. No. 13007-VCS (Del. Ch. Feb. 20, 2018), the Court of Chancery denied a motion to dismiss a complaint challenging a self-dealing transaction and in the process methodically assessed whether the plaintiff adequately had pleaded facts sufficient to raise a doubt as to the independence and disinterest of a majority of the board and also whether approval under Section 144(a)(1) suffices to invoke the business judgment rule so as to require dismissal of the claim. Practitioners would be well-advised to pay close attention to the guidance the opinion offers concerning what counts as a disabling interest or relationship and also how much protection Section 144(a)(1) approval provides.

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