Blasband, a Danaher stockholder, sued derivatively over Easco's use of proceeds from a note offering to purchase over $61.9 million in Drexel junk bonds rather than the safer investments described in the prospectus. The amended complaint alleged that the Easco board made those investments to benefit the Rales brothers' relationship with Drexel, causing substantial losses to Easco. The challenged investment decision was made by Easco's board, not Danaher's board, although three Danaher directors were also on Easco's board and the Rales brothers held major ownership and influence positions at Danaher and affiliated companies. At the time suit was filed, Danaher's eight-member board included the Rales brothers, Caplin, Sherman, Ehrlich, Kellner, Stephenson, and Lohr.
Issue
When a derivative suit does not challenge a decision of the board that would consider a demand, what standard governs whether demand is excused? Under that standard, did the amended complaint allege particularized facts creating a reasonable doubt that a majority of Danaher's board could impartially consider a demand?
Rule
The Aronson test does not apply when the board asked to consider demand did not make the challenged business decision. In that situation, demand is excused if the particularized factual allegations create a reasonable doubt that, as of the time the complaint was filed, a majority of the board could have properly exercised its independent and disinterested business judgment in responding to a demand.
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One of 10 multiple-choice questions for this case. Pick an answer to see why.
Lakeshore Holdings, a Delaware parent corporation based in Chicago, owns all the stock of Mesa Components, a Delaware subsidiary in Phoenix. A Lakeshore stockholder files a derivative action alleging that Mesa's board, not Lakeshore's board, caused Mesa to overpay for distressed debt to help two Mesa directors preserve their relationship with a financing house in New York; no demand was made on Lakeshore's current board.
What is the proper standard for deciding whether demand on Lakeshore's board is excused?
Explanation. When the board asked to consider demand did not make the challenged business decision, the Aronson two-prong test does not apply. The court instead asks whether particularized allegations create a reasonable doubt that, as of the filing date, a majority of the demand board could properly exercise independent and disinterested business judgment in responding to demand. Demand is not automatically excused in parent-subsidiary settings, and the majority rejected a reasonable-probability-of-success requirement. (Derived from Rales v. Blasband (1993).)