Lewis v. Aronson

Delaware Court of Chancery · 1983 · Corporations

CorporationsDerivative suitsDemand futilityBusiness judgment ruleCorporate wasteRule 23.1pre-suit demanddemand futility

Facts

Plaintiff challenged a five-year employment agreement between Meyers Parking and its chairman, Leo Fink, as well as loans made to him. The complaint alleged that Fink, then 75 years old and a substantial stockholder, received generous compensation and that the agreement allowed him, if retained as a consultant after termination, to continue receiving compensation even if he was unable to perform any services. Plaintiff did not make a pre-suit demand, claiming demand was futile because Fink dominated the board, the directors had approved or acquiesced in the transactions, and any demand would have required the directors to sue themselves. The board included outside directors, and the complaint did not allege particularized facts showing that directors other than Fink were financially interested or actually controlled by him.

Issue

Whether the derivative complaint alleged with sufficient particularity that a pre-suit demand on Meyers Parking's board would have been futile under Rule 23.1. More specifically, the question was whether allegations of domination, hostility, and board approval of the Fink agreement were enough to show the board could not have impartially considered a demand.

Rule

Under Chancery Rule 23.1, a stockholder who does not make a pre-suit demand must plead with particularity facts showing that demand would have been futile. The test is whether the board, at the time the suit was filed, could have impartially considered and acted on the demand. Mere conclusory allegations of control, acquiescence, or hostility are insufficient; the plaintiff must allege particular facts supporting an inference that the business judgment rule does not protect the challenged approval, such as facts showing interestedness, potential liability, or a transaction reasonably inferable as wasteful on its face.

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

Nina Patel, a shareholder of Lakefront Transit Systems, Inc., filed a derivative suit in Delaware Chancery challenging a retirement package approved for the company's chair in Cleveland. She made no pre-suit demand, and after the complaint was filed the board publicly announced that the suit was meritless and authorized counsel to seek dismissal.

Is the board's post-filing decision to oppose the suit enough, by itself, to excuse Nina's failure to make a pre-suit demand?

Explanation. Demand futility turns on whether the board could have impartially considered a demand at the time the action was commenced. Later board hostility, including authorizing a motion to dismiss, does not itself show that a pre-suit demand would have been futile. (Derived from Lewis v. Aronson (n.d.).)