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Joseph M. McLaughlin and Shannon K. McGovern. Courtesy photos Joseph M. McLaughlin and Shannon K. McGovern. Courtesy photos

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.

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