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.

Background Facts

At issue were three interrelated transactions. First, the plaintiff alleged that the defendants approved a transaction by which assets were acquired from a sister company at an unfair price. Second, the plaintiff alleged that the acquirer financed the transaction through an equity offering that favored the majority owner of the seller to the detriment of the acquirer. Third, the plaintiff alleged that the acquirer entered into an agreement to manage the acquired assets at a higher-than-market price. The defendants moved to dismiss on the ground that the plaintiffs had failed to plead particularized facts that demand would have been futile and that the plaintiffs had failed to state a claim, in part because the transaction was protected from attack by approval under Section 144(a)(1) of the DGCL.

Court Finds Plaintiff Adequately Alleged That Majority of the Board Was Not Disinterested or Independent