The Delaware Court of Chancery recently held in Solak v. Welch, No. 2018-0810-KSJM (Del. Ch. Oct. 30, 2019), that a plaintiff’s letter to a board of directors suggesting the board look into its compensation system constituted a pre-suit demand. The decision reminds Delaware practitioners that if a letter looks like a demand, feels like a demand, and reads like a demand, it’s probably a demand—even if the stockholder plaintiff says otherwise.
Whether a letter to a board is a “demand” matters under Delaware law because it dictates the standard that applies in stockholder-derivative litigation that may arise out of the issues raised in the letter. If the letter is a “demand” letter, the stockholder plaintiff, by sending the letter, “‘tacitly concedes’” that the board was able to properly consider the demand (quoting Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990)). If the board declines to take the action recommended in a demand letter, a stockholder plaintiff faces a difficult burden of demonstrating that the board “wrongfully refused” to take action in response to the demand, and therefore is not entitled to the protection of the business judgment rule. If, on the other hand, a letter to a board is not a “demand,” the stockholder plaintiff can satisfy the demand requirement by pleading particularized facts demonstrating that it would have been futile to make a demand before filing suit. Although pleading demand futility is not easy, it generally is a lower pleading burden than pleading facts demonstrating wrongful refusal.
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