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.
The mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors, although in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.View Full Point of Law
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.