Pogostin v. Rice

Delaware Supreme Court · Corporations

CorporationsDerivative suitsDemand futilityBusiness judgment ruleExecutive compensationTender offersRule 23.1demand futility

Facts

Tamco made a tender offer for City stock at $32.50 per share when the stock had been trading at about $20, and City's board unanimously rejected the offer after a special committee of outside directors and two investment banking firms concluded the price was too low and that City stock was worth about $48 per share. Plaintiffs alleged the board improperly rejected the offer to let the four inside directors retain control and continue receiving benefits. Plaintiffs also challenged payments under a 1971 shareholder-approved Share Unit Plan, claiming the tender offer artificially inflated market prices and caused abnormally large payments to the four officer-directors. Demand was not made; plaintiffs alleged only that all directors participated in the wrongs and could not be expected to sue themselves.

Issue

Whether the complaint alleged particularized facts sufficient under Delaware Chancery Rule 23.1 to excuse demand on City's board as futile. More specifically, the question was whether the allegations created a reasonable doubt either that the directors were disinterested and independent or that the challenged actions were valid exercises of business judgment.

Rule

Under Aronson, demand is excused only if the complaint's particularized facts create a reasonable doubt that: (1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Bare allegations that directors participated in wrongdoing, are liable, or would not sue themselves do not satisfy Rule 23.1. In the takeover context, an informed decision to reject a takeover proposal does not excuse demand absent particularized allegations of fiduciary breach such as self-dealing, fraud, overreaching, lack of good faith, or facts showing that perpetuation of control was the sole or primary purpose.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

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

Lakeshore Materials, Inc., a Delaware corporation based in Cleveland, has a 9-member board. Shareholder Nina Patel files a derivative suit in Delaware challenging the board's approval of a refinery purchase, alleging only that all directors approved the deal, are therefore liable for breach of fiduciary duty, and cannot be expected to sue themselves. She made no pre-suit demand.

Should demand be excused?

Explanation. Demand is excused only if particularized facts create a reasonable doubt either that directors are disinterested and independent or that the transaction was a valid exercise of business judgment. Bare assertions that directors participated in wrongdoing, face liability, or would not sue themselves are insufficient. That is exactly all Nina alleges here, so demand is not excused. (Derived from Pogostin v. Rice (n.d.).)