A stockholder plaintiff seeking to bring derivative claims on behalf of a corporation must choose one of two paths. The shareholder makes the threshold directional decision whether to: (1) make a pre-suit demand on the board of directors asking it to pursue the alleged claim, or (2) initiate litigation, purportedly on behalf of the corporation, and allege that pre-suit demand is excused as futile. If a shareholder makes a demand on the board rather than alleging that demand is excused, in litigation challenging the demand refusal the law deems the shareholder to have conceded that a majority of the board is disinterested and independent for purposes of reviewing the demand. This in turn limits judicial inquiry to the due care and good faith of board consideration of the demand. When the board delegates to a special committee the consideration of a stockholder pre-suit demand, the question arises whether the stockholder’s tacit concession of the full board’s ability to consider the demand impartially extends to the committee. In City of Tamarac Firefighters’ Pension Tr. Fund v. Corvi, 2019 WL 549938 (Del. Ch. Feb. 12, 2019), Delaware Vice Chancellor Kathaleen S. McCormick ruled that the “tacit concession” arising from pre-suit demand does not extend to the members of the special committee, so that a court evaluating whether plaintiff has offered particularized allegations of wrongful demand refusal may consider whether a committee to which demand review is delegated in fact conducted a reasonable investigation in good faith.
Background
Of the two potential paths available to a stockholder seeking to pursue derivative litigation—alleging demand excusal with particularity or making a pre-suit demand—“the former is a steep road, but the latter is ‘steeper yet.’” Corvi, 2019 WL 549938, at *5. Once demand has been made, the shareholder lacks standing to pursue a derivative claim unless and until the board wrongfully refuses to assert the claim. By making pre-suit on the board, the stockholder tacitly concedes the disinterest and independence of a majority of the board members in responding. If demand is refused, the “tacit concession” by plaintiff that a majority of the board can fairly respond narrows the court’s inquiry to the board’s good faith and the reasonableness of the investigation, i.e., business judgment rule review. There is no prescribed procedure that a board must follow when investigating a demand under Rule 23.1. To survive a motion to dismiss, plaintiff must plead with particularity facts sufficient to create a reasonable doubt that (1) the board or special committee decision to deny the demand was consistent with its duty of care to act on an informed basis (i.e., was not grossly negligent); or (2) the board or special committee acted in good faith, consistent with its duty of loyalty. Ordinarily, the plaintiff is not entitled to discovery in the derivative action in seeking to meet the particularized pleading requirements of Rule 23.1.
‘Corvi’
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