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.
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.
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
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.