Spiegel v. Buntrock

Supreme Court of Delaware · Corporations

CorporationsDerivative actionsDemand requirementSpecial litigation committeesBusiness judgment rulederivative suitdemand madedemand excused

Facts

Spiegel, a Waste Management stockholder, filed a derivative action alleging that certain management defendants improperly acquired ChemLawn stock based on inside information during the two years before Waste Management's tender offer for ChemLawn. Waste Management moved to dismiss because Spiegel had not made a pre-suit demand or adequately pleaded demand futility. Spiegel then sent a demand letter asking the board to take action on the allegations in his complaint. The board created a special litigation committee of outside directors, delegated authority to review and act on the demand, and after an investigation the committee concluded that pursuing the derivative action was not in the company's best interests.

Issue

Whether a stockholder who makes a demand after filing a derivative suit may still argue that demand was excused as futile, and whether the board's refusal of that demand through a special litigation committee should be reviewed under Zapata or under the traditional business judgment rule. Also, whether the board's use of a special litigation committee itself conceded that demand was excused.

Rule

By making a demand, a stockholder tacitly acknowledges the absence of facts supporting futility and therefore waives any claim that demand is excused; once demand is made, the issue of demand futility is moot. When a demand is refused, judicial review is under the traditional business judgment rule, and when the board delegates response authority to a special litigation committee in that demand-refused posture, the court reviews only the committee's good faith and the reasonableness of its investigation, not the merits of its ultimate decision. Zapata's two-step review applies only where demand is excused and the board seeks to regain control of litigation through an independent special litigation committee.

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

Nina Patel, a stockholder of Lakefront Robotics, Inc., filed a derivative suit in Delaware alleging that several officers diverted a corporate opportunity in Seattle. After the corporation moved to dismiss for failure to make demand under Rule 23.1, Nina sent the board a letter asking it to pursue the same claims described in her complaint.

If Nina argues at the hearing on the motion that demand should still be excused as futile because most directors were too close to management, how should the court rule?

Explanation. Under the majority rule, once a stockholder makes a demand, the stockholder tacitly acknowledges the board's capacity to respond and can no longer argue demand futility. The issue of demand excusal becomes moot, even if the demand is made after suit is filed. (Derived from Spiegel v. Buntrock (n.d.).)