Aronson v Lewis

Brief Fact Summary.

Plaintiff, Harry Lewis, a stockholder of Meyers Parking Systems, Inc., (Meyers), brings a derivative suit against Defendants, Directors of Meyers, for alleged improper actions, without first making a demand for action on Defendants first.

Synopsis of Rule of Law.

A demand to a company’s directors is considered futile only where particularized facts are alleged that cause a reasonable doubt that the directors’ actions would be protected under the business judgment rule.

Facts.

Plaintiff’s derivative suit against Defendants is based on Defendants approval of certain transactions that occurred between Meyers and Defendant Director, Leo Fink (Fink), a 47% stockholder of Meyers. In particular, Plaintiff challenges an employment agreement between Meyers and Fink and an interest-free loan by Meyers to Fink.
Plaintiff claims he did not make a demand for action to Defendants before bringing this suit because such a demand would be futile for the following reasons: (1) Defendants participated in, approved, and may be personally liable for the wrongs complained of; (2) Fink controls and dominates Defendants because he personally selected Meyer’s officers and directors; and (3) Defendants would need to sue themselves, putting the action in hostile hands.
The Court of Chancery held that plaintiffs’ allegations raised a reasonable inference that the Defendants actions were unprotected by the business judgment rule and thus a demand for action to Defendants would be futile. Defendants appeal.

Issue.

When is a shareholder’s demand to the company’s directors considered futile so as to excuse the need to make such a demand before a derivative suit is filed as required under Chancery Rule 23.1?

Held.

The Court of Chancery’s holding is reversed because the Plaintiff failed to first make a demand to Defendant Directors before bringing a derivative suit. Plaintiff further failed to show that such a demand was excused because he did not allege particularized facts that indicate such a demand would be futile.

Discussion.

The business judgment rule protects directors’ managerial freedom to make decisions in the best interest of the company. To raise a reasonable doubt that the directors’ actions would be protected under the business judgment rule, the plaintiff must allege specific facts that causes reasonable doubt that “(1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.”
Here, Plaintiff’s allegation that Fink dominates and controls the Meyers’ board based on Fink’s 47% stock ownership and that he personally selected each Meyer director and officer is insufficient to support a claim that Defendants were not independent actors.

Plaintiff’s allegation that the board’s approval of the Meyers-Fink employment agreement violates the business judgment is insufficient to show that the agreement is a waste of corporate assets.

Plaintiff’s argument that demand is excused because Defendants otherwise would have to sue themselves is a bootstrap argument that fails because there are no particularized facts to overcome the presumption of director independence and proper exercise of business judgment.