Aronson v. Lewis

Supreme Court of Delaware · 1984 · Corporations

CorporationsDerivative suitsDemand futilityBusiness judgment ruleRule 23.1demand futilitybusiness judgment ruledirector independence

Facts

A Meyers stockholder challenged transactions between Meyers and director Leo Fink, who owned 47% of Meyers's stock. The board approved a long-term employment agreement for Fink with substantial compensation, consulting payments after termination, and a provision that his compensation would not be affected by any inability to perform services; the board also approved interest-free loans to Fink totaling $225,000. The complaint alleged these transactions had no valid business purpose, were wasteful, and were approved only because Fink selected and dominated the directors. Plaintiff made no pre-suit demand, asserting futility because all directors were defendants, had approved or acquiesced in the transactions, and were controlled by Fink.

Issue

When is a stockholder's pre-suit demand on the board excused as futile in a derivative action under Delaware law? Specifically, did this complaint allege particularized facts creating a sufficient basis to excuse demand under Rule 23.1?

Rule

Demand is excused only if the complaint alleges particularized facts creating a 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. Mere board approval of a challenged transaction, mere threat of personal liability, conclusory allegations of domination, or the bare assertion that directors would have to sue themselves are insufficient to excuse demand.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Robotics, Inc., a Delaware corporation headquartered in Denver, approved a patent sale to one of its directors, Nina Carver. Five of the nine directors voting on the deal would each receive a side payment from Nina under separate consulting agreements tied to the closing, a benefit not shared by the corporation or stockholders generally.

A stockholder files a derivative suit in Delaware without making a pre-suit demand. Is demand most likely excused?

Explanation. Demand is excused when particularized facts create a reasonable doubt that the directors are disinterested and independent or that the transaction was the product of valid business judgment. Where a majority of the board approving the transaction stands to receive personal financial benefits in a self-dealing sense, the business judgment rule does not apply for this inquiry, and futility is established.