Business Organizations 3

There must be a pre-suit demand on the board, explaining the claims that the complainant wishes investigated and remedied. If the board reaches a decision not to pursue, the shareholder may challenge the directors’ decision as a breach of fiduciary duty, but cannot directly pursue the original claim that was the subject of the demand, unless the directors’ action in refusing to institute litigation would not be protected by the BJR.

EXCEPTION: General requirement but can avoid demand where it will likely be futile – must plead with particularized facts which creates a reasonable doubt that the directors’ action was entitled to protections of the business judgment rule. Legal Test for if demand is futile: Lack of independence or interestedness; OR Disinterestedness—financial stake in the matter. Aronson Test.

“Reasonable doubt” in corporate jurisprudence means “the SH has a reasonable belief that the board lacks independence or that the transaction was not protected by the BJR”

Must allege with particular facts but cannot do discovery until a discovery has been made on the motion for failure to make demand -- It’s tough to satisfy both Rule 23 and Rule 11(b)(3), since you can’t plead something you don’t have evidentiary support (or if it’s not likely to have evidentiary support) but you can’t get discovery until you survive a Rule 23 motion to dismiss for failure to demand. Court's response is that pp's have "tools at hand" to develop facts under DE 220 records/books inspection rule

A suit is derivative unless the complaining shareholders have suffered a “special injury” separate and distinct from that suffered by other shareholders or is based on a contractual right.

powerful shareholder does not in and of itself show lack of independence Must show genuine issues of control Here, no such particular facts have been alleged. Fink owns less than a majority of stock, so he is not in total control of the corporation. Even majority stock control does not strip directors of the presumption of independence.

The Aronson test does not apply to every demand futility motion. A court should not apply the test where the board that would be considering the demand did not make a business decision, which is being challenged, in the derivative suit.

§ 1) Where a business decision was made by the board of a company, but a majority of the directors making the decision have been replaced § 2) Where the subject of the derivative suit is not a business decision of the board; and § 3) The decision being challenged was made by the board of a different corporation

In cases where demand has been made, the plaintiff is deemed to have tacitly conceded that the board is independent. Thus, the only inquiry left to be made when the demand is refused by the board rests on the analysis of good faith in the board’s inquiry into the matter

Instead, should look at whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Do the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If so, the demand will be excused as futile

“To establish lack of independence, a П meets his burden by showing that the directors are either beholden to the controlling SH or so under its influence that their discretion is sterilized.” The court should apply a subjective, actual person test to determine whether a particular director lacks independence because he is controlled by another

3 views: 1. NY – A court will inquire into the committee members disinterestedness, into the reasonableness of the procedures used in the deliberations and into their good faith, but they will not inquire into the substance of the special litigation committee’s decision (committee decision not to litigate gets BJR presumption) 2. Iowa – the recommendations of a SLC that derivative litigation be dismissed would be entitled to no more BJR deference than a recommendation made by the interested board (decision is treated same as if corp. BoD had made it) 3. Delaware (middle ground) – a court should inquire into the independence and good faith of an independent committee and the bases supporting its conclusions applying its own independent business judgment

a court should 1) inquire into the independence and good faith of an independent committee and the bases supporting its conclusions and 2) determine, applying its own independent business judgment, whether the motion should be granted.-- Creates a mini-litigation within a litigation. It’s a judicial backstop to prevent special litigation committees from manipulating their procedural advantages to terminate meritorious derivative claims. It’s a “smell test”. Johnson v. Hui.

If corp sets up a compensation committee but 1/2 of the compensation committee also sat on the bard, the rule is that Where at least one half or more of the board in place at the time of the complaint was filed approved the underlying transactions, which approval may be imputed to the entire board for purposes of proving demand futility, the Aronson test applies. Ryan v. Gifford

Rule of Rales—in some circumstances, where the plaintiff is trying to apply Aronson, it only makes sense to look at one of the two prongs If there is a difference between the two boards, then really only apply prong 1 of Aronson, but if it is the same board, then it may be better to look at both prongs. Directors who are sued have a disabling interest for a pre-suit demand purposes when “the potential for liability is not a mere threat but instead may rise to a substantial likelihood”