Beam v. Martha Stewart Living Omnimedia, Inc.

Delaware Court of Chancery · Corporations

CorporationsDerivative suitsDemand futilityDirector independenceCorporate opportunityOversightRule 23.1Rule 12(b)(6)

Facts

MSO's business and brand were closely identified with Martha Stewart, who was the founder, chairman, chief executive officer, director, and controlling shareholder with roughly 94.4% of the shareholder vote. The complaint challenged three categories of conduct: the board's alleged failure to monitor Stewart's personal activities surrounding her ImClone stock sale and later public statements, private sales of MSO stock by Stewart and former director Doerr to ValueAct, and continued payment of premiums on Stewart's split-dollar insurance policy. Demand was not made on the six-member board existing when suit was filed, and plaintiff alleged demand was futile because the directors were not independent or disinterested.

Issue

Whether Counts II, III, and IV stated claims for breach of fiduciary duty, and whether demand on MSO's board was excused as futile as to Count I under Rule 23.1. More specifically, the court considered whether directors had a duty to monitor Stewart's personal affairs, whether Stewart and Doerr usurped a corporate opportunity by selling their own MSO shares, whether the split-dollar insurance allegations stated a Delaware fiduciary-duty claim, and whether the particularized allegations created a reasonable doubt that a majority of the board could consider a demand independently and disinterestedly.

Rule

Under Rales, when a derivative claim does not challenge a board decision, demand is excused only if the particularized allegations create a reasonable doubt that, at the time the complaint was filed, a majority of the board could have properly exercised independent and disinterested business judgment in responding to a demand. Allegations of personal or professional friendship, majority voting control, or ordinary director compensation do not alone establish lack of independence; the complaint must plead specific facts showing the relationship or interest is material enough to impair judgment. Delaware law does not impose on directors a duty to monitor an officer's or director's personal affairs, the corporate opportunity doctrine is governed by the Broz factors, and a Caremark-type oversight claim requires facts showing directors knew or should have known of illegality and took no good-faith steps to prevent or remedy it.

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Lena Ortiz owns shares of Harbor Table Media, a Delaware corporation based in Boston whose founder, Nora Finch, controls 92% of the vote and serves as chair and CEO. Lena files a derivative suit in Delaware without making demand, alleging Nora caused reputational harm through suspected personal tax misconduct; of the six directors, two are concededly interested, while the other four are outside directors who receive ordinary board fees and were elected with Nora's support.

Under the governing demand-futility standard for a claim not challenging a board decision, is demand most likely excused?

Explanation. When the derivative claim does not attack a board decision, Rales asks whether particularized allegations create a reasonable doubt that, when suit was filed, a majority of the board could exercise independent and disinterested business judgment on a demand. The majority opinion held that majority voting control and routine director compensation, standing alone, are insufficient to show lack of independence. With only two interested directors and no particularized facts impairing the other four, demand is not excused. (Derived from Beam v. Martha Stewart Living Omnimedia, Inc. (n.d.).)