Grobow v. Perot

Delaware Court of Chancery · Corporations

CorporationsShareholder derivative suitsDemand futilityBusiness judgment ruledemand futilityRule 23.1Aronsondirector disinterestedness

Facts

After GM acquired EDS, H. Ross Perot became a GM director, chairman of EDS, and GM's largest shareholder through Class E stock and contingent notes. Perot later publicly criticized GM management, demanded either autonomy to run EDS or a buyout, and GM's board approved a transaction repurchasing his securities and those of his associates for about $742.8 million, along with covenants including noncompetition, no recruitment of EDS executives, no purchases of GM stock, resignation from positions, and a promise not to criticize GM management. Plaintiffs alleged the transaction lacked a valid corporate purpose, wasted corporate assets, and breached fiduciary duties. Plaintiffs made no demand on the GM board before filing suit.

Issue

Whether plaintiffs' failure to make a pre-suit demand on GM's board was excused because the complaints alleged particularized facts creating a reasonable doubt either that the directors were disinterested and independent or that the challenged buy-back transaction was the product of a valid exercise of business judgment.

Rule

Under Aronson, demand is excused only if the complaint alleges particularized facts creating a reasonable doubt that either (1) the directors were disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Rule 23.1 requires more than conclusory allegations: plaintiffs must plead particularized facts sufficient to support a judicial finding of director interest, nonindependence, or lack of business-judgment protection. Allegations that directors approved the transaction, would have to sue themselves, or later refused to reconsider it are not enough by themselves to establish futility.

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

Nimbus Robotics, Inc., a Delaware corporation based in Seattle, repurchased a 6% stock block from a vocal shareholder at a premium after months of internal disagreement. A derivative plaintiff in Wilmington filed suit without making demand, alleging only that seven of the nine directors approved the repurchase and therefore would have to sue themselves if demand were made.

Should demand be excused on these allegations?

Explanation. Under the majority opinion, Rule 23.1 requires particularized facts creating a reasonable doubt under one of the Aronson prongs. Mere approval, participation, or acquiescence in the transaction does not itself establish futility, and neither does the assertion that the directors would have to sue themselves. Those allegations alone do not show interestedness, lack of independence, or that the transaction falls outside business-judgment protection. (Derived from Grobow v. Perot (n.d.).)