In the

United States Court of Appeals

For the Seventh Circuit

No. 01-1952

IN RE: ABBOTT LABORATORIES DERIVATIVE

SHAREHOLDERS LITIGATION

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 99 C 7246--James B. Moran, Judge.

ARGUED October 23, 2001--DECIDED June 6, 2002

 Before HARLINGTON WOOD, JR., CUDAHY, and

KANNE, Circuit Judges.

 HARLINGTON WOOD, JR., Circuit Judge. This

shareholder derivative suit arises from a

consent decree between Abbott

Laboratories ("Abbott") and the Food and

Drug Administration ("FDA"). The action

was brought in federal court on behalf of

Abbott shareholders against Abbott’s

board of directors alleging that the

directors breached their fiduciary duties

and are liable under Illinois law for

harm resulting from a consent decree

which required Abbott to pay a $100

million civil fine to the FDA, withdraw

125 types of medical diagnostic test kits

from the United States market, destroy

certain inventory, and make a number of

corrective changes in its manufacturing

procedures after six years of federal

violations. The district court dismissed

the original complaint for failure to

plead demand futility with particularity

under Fed. R. Civ. P. 23.1 and has now

dismissed the amended complaint for the

same reason. We reverse and remand for

further proceedings.

I. BACKGROUND

 Abbott, an Illinois corporation, is a

diversified health care company that

develops and markets pharmaceutical,

diagnostic, nutritional, and hospital

products. Abbott’s Diagnostics Division

("ADD") manufactures hundreds of

different kinds of diagnostic kits and

devices, including tests which indicate

the safety of donated blood, detect heart

attacks, and identify cancerous tumors.

These products are heavily regulated by

the FDA and must be manufactured in

accordance with the "Quality System
Regulations" ("QSR"), 21 C.F.R. sec. 820,

and the requirements of the "Current Good

Manufacturing Practice" ("CGMP"), as

defined in 21 C.F.R. sec. 820.1. These

regulations expressly assign corporate

management the responsibility to assure

compliance with CGMP. 21 C.F.R. sec.

820.20. The FDA periodically inspects

manufacturing plants to ensure

compliance.

 During a six-year period from 1993 until

1999, the FDA conducted thirteen separate

inspections of Abbott’s Abbott Park and

North Chicago facilities. The

inspections, some lasting for two months

or longer, were conducted under a program

designed not only to ensure that data and

information concerning the in vitro

diagnostic products are scientifically

valid and accurate, but to ensure that

the human subjects are protected from

undue hazard or risk during the course of

the scientific investigations. After each

inspection, the FDA first sends a Form

483 to the manufacturer which notes any

deviations under the CGMP, then discusses

the findings with the manufacturer’s

representative, and requests a plan for

correcting the violations.

 In addition to the Form 483s and the

ensuing follow-up after each inspection,

the FDA sent four formal certified

Warning Letters to Abbott. The first was

sent by the FDA’s district director to

David Thompson, president of ADD, on

October 20, 1993, noting that an FDA onsite inspection at the North Chicago

facility from April 7 through May 4, 1993

had found adulterated/1 in vitro

diagnostic products not in conformance

with the CGMP. The letter stated,

"Failure to correct these deviations may

result in regulatory action being

initiated by the Food and Drug

Administration without further notice.

These actions include, but are not

limited to seizure, injunction, and/or

civil penalties." All of the Warning

Letters and follow-up letters contained

that statement. A second Warning Letter

from the district director was sent on

March 28, 1994 to Thompson and copied to

Duane Burnham, chairman of the board of

directors and Chief Executive Officer

("CEO") of Abbott. After an inspection at

the Abbott Park facility, the FDA

reiterated that certain in vitro

diagnostic test kits had failed to comply
with the CGMP. A follow-up letter from

the FDA’s acting director to the manager

of ADD, again copied to Burnham, was sent

by overnight mail on October 11, 1994

which detailed the continuing

deficiencies of certain diagnostic test

kits. This letter also noted that the FDA

had reviewed Abbott’s responses to the

483s issued on June 10, 1994 and July 13,

1994, and requested "written

documentation of any other specific steps

you have taken or will be taking to

correct these violations and to prevent

the recurrence of similar violations in

current and future studies."

 On January 11, 1995, the Wall Street

Journal published an article discussing

the fact that the FDA had "uncovered a

wide range of flaws in Abbott

Laboratories’ quality-assurance

procedures used in assembling medicaldiagnostic products, including kits to

test for hepatitis and AIDS." The article

also noted that Abbott stock had fallen

fifty cents to $31.25 a share.

 In July 1995, the FDA and Abbott entered

into a comprehensive Voluntary Compliance

Plan to work "together to achieve

compliance in areas recognized by FDA and

Abbott to be problematic" at the Abbott

Park and North Chicago facilities. On

February 26, 1998, the FDA district

director sent the equivalent of a Warning

Letter to Abbott, stating that although

the FDA "recognize[d] Abbott

Laboratories’ efforts to meet all of the

Compliance Plan commitments," after

finding continued deviations from the

regulations, the FDA was closing out the

Compliance Plan.

 On March 17, 1999, the FDA district

director sent the fourth and final

certified Warning Letter to Miles White,

a member of Abbott’s board of directors

and current CEO./2 This letter

discussed the findings of adulterated in

vitro diagnostic kits and other problems

after an inspection at the Abbott Park

facility from September 8 to November 4,

1998. The letter stated that the FDA

would be conducting a re-inspection to

determine the adequacy of Abbott’s

compliance.

 On April 13, 1999, White sold thirty

percent of his Abbott stock, totaling

89,895 shares sold at $52.72 per share,

receiving $4,739,264. On June 15, 1999,
the March 17 Warning Letter was reported

in Bloomberg News. The article stated that

Abbott was working with the FDA to

resolve the problems and noted that

Abbott shares had risen slightly to close

at $43.25.

 On September 28, 1999, Abbott issued a

press release disclosing that it had been

notified by the FDA of alleged

noncompliance of the CGMP and QSR. The

release stated that "[a]lthough Abbott

believes that it is in substantial

compliance with these regulations, the

FDA disagrees," and noted that if the

discussions were not successful, the FDA

had advised the company that it would

"file a complaint for injunctive relief

which would include the cessation of

manufacturing and sale for a period of

time of a number of diagnostic products."

 On September 29, 1999, Bloomberg News

reported that shares of Abbott

Laboratories "fell 6.3 percent [to

$37.25] after U.S. regulators threatened

to halt sales of some Abbott diagnostic

products on concerns about quality

controls," stating this was the latest

setback "in a string of manufacturing

problems for Abbott" dating from 1998 and

that "the FDA has given them a swift kick

to prod them into fixing things." The

article noted that ADD represented

approximately 22 percent, or $2.79

billion, of Abbott’s total sales in 1998,

with an operating profit of $448 million,

or 13 percent of the company’s total

profit. Although the article quoted a

stock analyst as having a "buy" rating on

the stock, the analyst also stated that

he did not understand "why [Abbott] seems

to have dragged their feet fixing the

problems. Wall Street punishes companies

that have run-ins with the FDA."

 On September 30, 1999, Abbott filed a

disclosure form with the Securities and

Exchange Commission ("SEC"),

acknowledging it had received

notification by the FDA of noncompliance

with the QSR at two of its facilities.

Abbott also reported they disagreed with

the findings of noncompliance and would

fight any legal suit. On November 2,

1999, the FDA filed a complaint for an

injunction, detailing its problems with

Abbott over the prior six-year period. On

the same date, both parties signed a

consent decree which prohibited Abbott
from the continued manufacture of certain

in vitro diagnostic devices until

independent experts and FDA inspectors

deemed the two facilities in conformity

with the CGMP and FDA regulations. The

decree also stated that Abbott would pay

a $100 million fine, the largest penalty

ever imposed for a civil violation of FDA

regulations.

 In addition, under a proposed master

compliance plan, Abbott was ordered to

destroy under FDA supervision certain

inventories of specific in vitro

diagnostic kits and withdraw those kits

from the U.S. market until compliance had

been achieved. The suspension of these

kits would result in a loss of

approximately $250 million in annual

revenue. In a press release following the

consent decree, Abbott announced that it

would take a $168 million charge against

Abbott’s earnings in the third quarter of

1999 to cover the FDA fine and the loss

from the unmarketable test kits.

 Plaintiffs also maintain that these

problems with the FDA caused the collapse

of Abbott’s acquisition of Alza

Corporation ("Alza"), a drug delivery

company, in a planned acquisition valued

at approximately $7.3 billion, which

plaintiffs assert was in the best

interest of Abbott. Alza shareholders

were to exchange 1 share of Alza stock

for 1.2 shares of Abbott stock.

Plaintiffs allege that the directors had

a motive to conceal Abbott’s quality

problems because disclosure of the

continuing pattern of violations over a

six-year period would have possibly

doomed the buyout or, at the very least,

jeopardized the agreed-upon price. On

December 11, 1999, Abbott announced it

was abandoning the acquisition. On

December 17, 1999, the Wall Street Journal

reported, "Wall Street and industry

officials widely viewed the transaction

as being in jeopardy in recent weeks

because the value to Alza shareholders

had fallen" following a decline in the

price of Abbott’s stock after the FDA

filing and consent decree.

 Shortly thereafter, several Abbott

shareholders brought derivative actions

which have been consolidated in this

case. These plaintiffs seek to hold

Abbott’s directors personally liable for

the losses incurred as a result of the
consent decree. At the time the

litigation was initiated, Abbott had

thirteen directors. Two of those

thirteen, Miles White, Abbott’s chairman

and CEO, and Robert Parkinson, president

and Chief Operating Officer, were "inside

directors" who are both corporate

officers and full-time Abbott employees.

The remaining eleven were "outside" or

"independent" directors who received a

monthly stipend for their services but

were not Abbott employees.

 In their claim for breach of fiduciary

duty, plaintiffs maintain that the

directors were or should have been aware

of the six-year history of noncompliance

problems with the FDA and that they had a

duty to take necessary action to correct

these problems in a division of Abbott

which accounted for 20 percent of the

company’s annual revenues. They allege

that the directors demonstrated gross

negligence by ignoring the FDA problems

for six years. Plaintiffs also maintain

that the directors had a duty of due

diligence by signing the SEC forms, which

specifically address in part government

regulations in the development,

manufacture, sale, and distribution of

products. These forms were signed by the

directors every year during the six-year

period in question. As the 1996 10-K

illustrates, the directors signed off on

statements such as, "[Abbott’s products]

are subject to comprehensive government

regulation [which] substantially

increases the time, difficulty, and costs

incurred in obtaining and maintaining the

approval to market newly developed and

existing products," "[t]he FDA’s . . .

approach to regulations . . . will

increase the cost of compliance with

those regulations," "[t]he Company’s

facilities [including Abbott Park and

North Shore] are deemed suitable," "[t]he

Company is involved in various claims and

legal proceedings . . . [and] management

is of the opinion that their disposition

should not have a material adverse effect

on the Company’s financial position, cash

flows, or results of operations."

 The plaintiffs allege that the directors

met officially seven times in 1996, six

times in 1997, eight times in 1998, and

ten times in 1999. Plaintiffs maintain

that the directors received relevant

information concerning regulatory actions

and that the Warning Letters, several of
which were sent to the chairman of the

board, and Form 483s were "clearly

information that was required to be

brought to the attention of the Board

members by the Chairman . . . who had a

duty to [do so]." Plaintiffs also note

that the Audit Committee, which included

several members of the board, "is charged

with communicating regularly with Abbott

management" concerning management’s

assessment of business risks facing

Abbott, and that one of the functions of

the Audit Committee was to familiarize

themselves with any risks involving the

legal and regulatory framework which

would affect Abbott’s operations.

Plaintiffs also stated that during the

relevant time period, Abbott’s proxy

statements noted that the Audit Committee

"met with Abbott’s internal auditors to

evaluate the effectiveness of their work

in ensuring that Abbott’s various

departments, including its Regulatory

Affairs Department [which was responsible

for Abbott’s compliance with FDA

regulations], operated properly."

 Plaintiffs, however, did not make any

demand on Abbott’s board of directors to

institute an action against themselves

for breach of their fiduciary duties,

stating that such a demand would have

been futile. Plaintiffs maintain that the

facts as alleged in the complaint

demonstrate that the directors

knew of the continuing pattern of

noncompliance with FDA regulations and

knew that the continued failure to comply

with FDA regulations would result in

severe penalties and yet ignored repeated

red flags raised by the FDA and in media

reports and chose not to bring a prompt

halt to the improper conduct causing the

noncompliance, nor to reprimand those

persons involved, nor to seek redress for

Abbott for the serious damages it has

sustained . . . .

 The district court dismissed the

complaint for failure to plead demand

futility with particularity under Fed. R.

Civ. P. 23.1, stating that the complaint

did not plead facts to show Abbott’s

directors faced a substantial likelihood

of liability for their actions.

Plaintiffs appeal.

II. ANALYSIS
A. Standard of Review

 Seventh Circuit precedent indicates that

a district court’s determination as to

whether or not a demand upon the board of

directors would have been futile,

assuming no error of law has been made,

is reviewed for abuse of discretion. See

Starrels v. First Nat’l Bank of Chicago,

870 F.2d 1168, 1170 (7th Cir. 1989);

Powell v. Gant, 556 N.E.2d 1241, 1245

(Ill. App. Ct. 1990) (holding that trial

court’s determination of whether demand

is excused may only be reversed for

"manifest abuse of discretion"). Because

Abbott was incorporated under the laws of

Illinois, Illinois law applies in

determining whether a demand may be

excused when shareholders file a

derivative complaint on behalf of the

company. See Kamen v. Kemper Fin. Servs.,

Inc., 500 U.S. 90, 98-99 (1991). Illinois

case law follows Delaware law in

establishing demand futility requirements

and uses the test to determine demand

futility set forth in Aronson v. Lewis,

473 A.2d 805 (Del. 1984). See Spillyards

v. Abboud, 662 N.E.2d 1358, 1366 (Ill.

App. Ct. 1996). Both parties agree

Delaware law controls.

 However, the Delaware Supreme Court

recently stated that in a motion to

dismiss a derivative suit for demand

futility, "our review of decisions of the

Court of Chancery applying Rule 23.1 is

de novo and plenary." Brehm v. Eisner,

746 A.2d 244, 253 (Del. 2000) (en banc),

overruling in part Aronson v. Lewis, 473

A.2d 805 (Del. 1984) (overruling abuse of

discretion standard for demand futility

in derivative action). The court in Brehm

stated that its review was the same

analysis applied by the trial court in

making its decision and that decision is

not a discretionary ruling such as an

administrative agency’s findings of fact

or a credibility determination which

would be accorded deference. Id. The

court noted, "In a Rule 23.1

determination of pleading sufficiency,

the Court of Chancery, like this Court,

is merely reading the English language of

a pleading and applying to that pleading

statutes, case law and Rule 23.1

requirements. To that extent, our scope

of review is analogous to that accorded a

ruling under Rule 12(b)(6)." Id. at 254;

see Conley v. Gibson, 355 U.S. 41, 45-46

(1957) (holding that because district
court’s grant of a motion to dismiss for

failure to state a claim is a question of

law, review is de novo); see also McCall

v. Scott, 239 F.3d 808, 817 (6th Cir.

2001) ("we review de novo the question of

whether plaintiffs alleged with

sufficient particularity facts that

create a reasonable doubt as to disinter

estedness and independence of a majority

of directors"). We agree with this

reasoning and, because we are required to

make a determination based on Aronson,

will review de novo the dismissal of this

derivative shareholder’s complaint based

on failure to plead demand futility. And,

as in a Rule 12(b)(6) motion to dismiss,

any inferences drawn from the factual

allegations of the complaint must be

viewed in the light most favorable to the

plaintiffs. Brehm, 746 A.2d at 255; In re

Healthcare Compare Corp. Sec. Lit., 75

F.3d 276, 279 (7th Cir. 1996).

B. Demand Futility

 In a derivative suit, an individual

shareholder seeks to enforce a right that

belongs to the corporation. See Kamen,

500 U.S. at 95. However, given "the basic

principle of corporate governance that

the decisions of a corporation--

including the decision to initiate

litigation--should be made by the board

of directors or the majority of

shareholders," most jurisdictions require

a pre-suit demand be made of the

corporation’s board of directors. Id. at

96. This allows the directors to exercise

their business judgment and determine

whether litigation is in the best

interest of the corporation. Id.

 Rule 23.1 requires the plaintiff "to

allege with particularity the efforts, if

any, made by the plaintiff to obtain the

action the plaintiff desires from the

directors . . . and the reasons for the

plaintiff’s failure to obtain the action

or for not making the effort." However,

the requirement of a shareholder demand

is more than a pleading requirement, it

is a substantive right of the shareholder

and the directors. See Kamen, 500 U.S. at

97. It is the law of the state of

incorporation which controls these

substantive rights and governs what

excuses are adequate for failure to make

demand. See id. at 98-99, 101; Boland v.

Engle, 113 F.3d 706, 710 (7th Cir. 1997).
 The "futility" exception establishes the

circumstances in which the shareholder is

allowed to circumvent the directors’

authority to manage corporate affairs.

See Kamen, 500 U.S. at 102. Whether a

shareholder should be allowed to proceed

without making demand "is based on the

application of the State’s futility

doctrine . . . ." Id. at 104. Illinois

law requires that a demand be made or

excuses demand when the request would be

futile as a prerequisite to a derivative

action. 805 Ill. Comp. Stat. 5/7.80(b)

(1999) (also referred to as sec. 7.80(b)

of the Business Corporation Act of 1983);

see also Schnitzer v. O’Connor, 653

N.E.2d 825, 829 (Ill. App. Ct. 1995)

(stating that demand rule 7.80(b) is "al

most identical" to Fed. R. Civ. P. 23.1).

The shareholder must state with

particularity why a demand would have

been futile. Starrels, 870 F.2d at 1170

(citations omitted). However, it is not

sufficient for the shareholder to simply

state "in conclusory terms that he made

no demand because it would have been

futile." Id. (citation omitted). Although

plaintiffs have a conclusory paragraph in

their claim of demand futility, they have

also incorporated all of the detailed

factual allegations. A review for demand

futility "is factual in nature," and the

alleged facts are reviewed "to decide

whether they raise a reasonable doubt . .

. that the protections of the business

judgment rule are available to the

board." Aronson, 473 A.2d at 814-15. Our

review is applied to the particularized

facts, taking into consideration "the

presumption of regularity of the Board’s

process." Brehm, 746 A.2d at 259.

1. Aronson test

 To determine whether demand is futile

under Illinois law, the Illinois courts

have applied the standard set forth by

the Delaware Supreme Court in Aronson,

473 A.2d at 808, holding that "demand can

only be excused where facts are alleged

with particularity which create a reason

able doubt that the directors’ action was

entitled to the protections of the

business judgment rule." See Spillyards,

662 N.E.2d at 1366; Powell, 556 N.E.2d at

1245; see also Starrels, 870 F.2d at

1170-71; Silver v. Allard, 16 F.Supp.2d

966, 969 (N.D. Ill. 1998). The Aronson

test is applied in cases where there is a

conscious decision by the board of
directors to act or refrain from acting.

See 473 A.2d at 813. It is not applied

"where directors have either abdicated

their functions or . . . failed to act,"

although "a conscious decision to refrain

from acting may nonetheless be a valid

exercise of business judgment . . . ."

Id.

 The plaintiffs allege that the directors

"knowingly" in an "intentional breach

and/or reckless disregard" of their

fiduciary duties "chose" not to correct

the FDA problems in a timely manner,

indicating a conscious decision not to

act. As the court in Brehm stated,

This is a case about whether there should

be personal liability of the directors of

a [ ] corporation to the corporation for

lack of due care in the decisionmaking

process and for waste of corporate

assets. This case is not about the

failure of the directors to establish and

carry out ideal corporate governance

practices.

746 A.2d at 255-56. Given the facts of

the instant case, where FDA notices were

sent to the chairman of the board, where

the directors had a duty under the SEC to

comply with "comprehensive government

regulations," where the ongoing

violations lasted over an extended period

of six years, and where information

concerning the violations was made known

to the general public beginning in 1995,

we do not disagree with the plaintiffs’

allegations that the facts indicate the

directors purposefully took no action and

will, therefore, apply the Aronson test./3

 The court in Aronson stated that "the

entire question of demand futility is

inextricably bound to issues of business

judgment and the standards of that

doctrine’s applicability," explaining

that the business judgment rule is "a

presumption that in making a business

decision the directors of a corporation

acted on an informed basis, in good faith

and in the honest belief that the action

taken was in the best interests of the

company." 473 A.2d at 812. Plaintiffs

have the burden of establishing facts to

rebut this presumption. Id.

 The two-pronged test in Aronson provides

that demand futility is established if,

accepting the well-pleaded facts as true,
the plaintiffs raise a reasonable doubt

with alleged particularized facts that

either (1) the directors are

disinterested or independent or (2) the

challenged transaction was the product of

a valid exercise of the directors’

business judgment. 473 A.2d at 814;

Starrels, 870 F.2d at 1171.

a. First prong--disinterest or

independence

 A disinterested director "can neither

appear on both sides of a transaction nor

expect to derive any personal financial

benefit from [the challenged transaction]

in the sense of self-dealing, as opposed

to a benefit which devolves upon the

corporation or all stockholders

generally." Aronson, 473 A.2d at 812.

Plaintiffs have not offered any specific

facts to indicate that any of the

directors had divided loyalties. There

were no allegations of improper motives

or conflicts of interest. Nor, with the

exception of White’s sale of stock prior

to the FDA’s legal action, have

plaintiffs presented allegations that any

of the other directors profited in any

way by their actions, or lack thereof.

See In re Gen. Instr. Corp. Sec. Litig.,

23 F.Supp.2d 867, 874 (N.D. Ill. 1998)

(using Aronson test in finding eight

directors [out of thirteen] who sold

their company stock at inflated price for

over $500 million while concealing

adverse financial information about

company raised reasonable doubt as to

directors’ disinterest).

 In addition, plaintiffs have not pleaded

facts to raise reasonable doubt as to the

directors’ independence. Independence

exists when "a director’s decision is

based on the corporate merits of the

subject before the board rather than

extraneous considerations or influences."

Aronson, 473 A.2d at 816. There are no

specific allegations as to how each

individual director was influenced by

outside sources or considerations in

making decisions about the board’s

actions, or their failure to take action.

 We find the plaintiffs have not pleaded

specific allegations to create a

reasonable doubt as to the majority of

the directors’ disinterestedness or

independence.
b. Second prong--business judgment

 Under Aronson, "the mere threat of

personal liability for approving a

questioned transaction, standing alone,

is insufficient to challenge either the

independence or disinterestedness of

directors . . . ." 473 A.2d at 815.

However, demand may be excused if "in

rare cases a transaction may be so

egregious on its face that board approval

cannot meet the test of business

judgment, [resulting in] a substantial

likelihood of director liability," id.,

or if the directors exhibited "gross

negligence" in breaching their duty of

care. Brehm, 746 A.2d at 259 (citing

Aronson, 473 A.2d at 812).

 In order to invoke the protection of the

business judgment rule, Aronson holds

that "directors have a duty to inform

themselves, prior to making a business

decision, of all material information

reasonably available to them." 473 A.2d

at 812. Demand will be excused in a

derivative suit only if the trial court

and the appellate court, upon de novo

review, "conclude that the particularized

facts in the complaint create a

reasonable doubt that the informational

component of the directors’

decisionmaking process, measured by

concepts of gross negligence, included

consideration of all material information

reasonably available." Brehm, 746 A.2d at

259 (emphasis in original) (citing

Aronson, 473 A.2d at 812).

 We find that the facts alleged are

sufficient to show that although

corporate governance practices were in

place, the directors were grossly

negligent in failing to inform themselves

of all reasonably available material

information. See Brehm, 746 A.2d at 259.

The chairman of the board received copies

of the two Warning Letters in 1994 and

another in early 1999, and even though

the language in the Warning Letters is

described as "boilerplate," continuing

violations of federal regulations over a

period of six years cannot be minimized.

Several of the directors were members of

the Audit Committee, which addressed any

risks involved in regulatory compliance.

In addition, given their responsibilities

under the SEC filings, the directors knew

of the ongoing violations and knew of the

1995 compliance plan and its subsequent
failure in 1998. The FDA met at least ten

times with Abbott representatives,

including White and other senior

officers, concerning the continuing

violations of the regulations. The Wall

Street Journal published information about

Abbott’s FDA problems in 1995. By 1999,

even a third-party analyst questioned why

Abbott continued to "drag[] their feet

fixing the [FDA] problems." Although

Abbott sought to negate the effects of

this news in its press release of 1999,

the release itself substantiates the fact

that the company, and, correspondingly,

the board of directors, knew of the

problems and were aware that the FDA had

threatened to file an injunction against

Abbott. All of the above was "material

information reasonably available to [the

directors]." Aronson, 473 A.2d at 815.

 Delaware law also states that director

liability may arise for the breach of the

duty to exercise appropriate attention to

potentially illegal corporate activities

from "an unconsidered failure of the

board to act in circumstances in which

due attention would, arguably, have

prevented the loss." In re Caremark

Int’l, Inc. Derivative Litig., 698 A.2d

959, 967 (Del. Ch. 1996). The court held

that "a sustained or systematic failure

of the board to exercise oversight . . .

will establish the lack of good faith

that is a necessary condition to

[director] liability." Id. at 971.

Although the present case does not deal

with a claim of fraud like that in In re

Caremark, with the extensive paper trail

concerning the violations and the implied

awareness of the problems in the SEC

filings, it is clear that the directors

either knew or should have known of the

violations of law, took no steps in an

effort to prevent or remedy the

situation, and that failure to take any

action for such an inordinate amount of

time resulted in the substantial losses

incurred by the consent decree. See id.

 Plaintiffs have alleged the directors

ignored obvious problems concerning the

continuing federal violations and that

"the directors must have known of it."

See In re Baxter Int’l, Inc. Shareholders

Litig., 654 A.2d 1268, 1271 (Del. Ch.

1995). Plaintiffs have pleaded with

particularity "what obvious danger signs

were ignored" and that the directors

failed to take any measures. Id. We find
that obvious danger signs, as

particularized in six years of

noncompliance, inspections, 483s, Warning

Letters, notice in the press, the largest

civil fine ever imposed by the FDA, and

the destruction and suspension of

products which accounted for

approximately $250 million in corporate

assets are sufficient facts to indicate

that the directors failed to reasonably

inform themselves and that their failure

to act was not made in good faith and was

contrary to the best interests of the

company. See Aronson, 473 A.2d at 812,

818.

 With respect to demand futility,

plaintiffs have sufficiently pleaded

allegations to reasonably conclude that

the directors’ actions fall outside the

protection of the business judgment rule;

allegations which demonstrate conduct "so

egregious" that there is a substantial

likelihood of director liability.

Aronson, 473 A.2d at 815. Demand is

therefore excused. Id.; see In re Baxter,

654 A.2d at 1270-71. We note that this

holding applies only with respect to

demand futility and reflects no opinion

as to the truth of the allegations or the

outcome of the claims on the merits.

c. Directors’ exemption clause

 Abbott’s certificate of incorporation

exempts the directors from liability. The

Articles of Amendment to Abbott’s

Articles of Incorporation dated April 29,

1994, includes the following provision:

A director of the corporation shall not

be personally liable to the corporation

or its shareholders for monetary damages

for breach of fiduciary duty as a

director, except for liability (i) for

any breach of the director’s duty of

loyalty to the corporation or its

shareholders, (ii) for acts or omissions

not in good faith or that involve

intentional misconduct or a knowing

violation of law, (iii) under Section

8.65 of the Illinois Business Corporation

Act,/4 or (iv) for any transaction from

which the director derived an improper

personal benefit . . . . 

This language is identical to that of the

Illinois Business Corporation Act. See

805 Ill. Comp. Stat. sec. 5/2.10(b)(3).

When the certificate of incorporation
exempts directors from liability, the

complaint must plead non-exempt conduct

with sufficient particularity to permit

the court to reasonably conclude the

directors’ conduct falls outside the

exemption. See In re Baxter, 654 A.2d at

1270. As previously discussed,

plaintiffs’ complaint sufficiently

alleges "omissions not in good faith" and

"intentional misconduct" concerning

"violations of law," which conduct falls

outside of the exemption.

 In McCall, where the duty of care claims

arose from the board’s failure to act,

the Sixth Circuit held that with a

certificate of incorporation which

exempts the directors from personal

liability (with language identical to the

Abbott provision), a breach of the duty

of care did not require intentional

conduct on the part of the directors to

overcome a waiver of liability pursuant

to the certificate of incorporation. 239

F.3d at 818. The court held that it is

possible that reckless acts, which are

arguably acts not taken in good faith,

may overcome the certificate’s waiver.

Id. The plaintiffs in McCall alleged that

intentional or reckless disregard could

be inferred from the directors’ failure

to act in the face of audit information,

ongoing acquisition practices,

allegations brought against the

corporation in a qui tam action, a

federal investigation, an investigation

by the New York Times into the company’s

billing practices, and inaction by the

board. Id. at 819-20.

 The court in McCall held that the

directors’ failure to act against a

corporation’s systematic health care

fraud from at least 1994 to 1996 alleged

sufficient facts "to present a

substantial likelihood of liability." Id.

at 819. Although we recognize that there

were many more specific allegations to

support individual director liability in

the McCall case, the court also noted

that "the magnitude and duration of the

alleged wrongdoing is relevant in

determining whether the failure of the

directors to act constitutes a lack of

good faith." Id. at 823. The magnitude

and duration of the FDA violations in the

present case were so great that it

occasioned the highest fine ever imposed

by the FDA. We also take into

consideration that evidently neither FDA
censures nor public notice motivated the

directors to take any action concerning

the problems over a six-year period, as

opposed to the two-year period in McCall.

III. CONCLUSION

 For the above-stated reasons, the order

of the district court is REVERSED and the

case is REMANDED for further proceedings

consistent with this opinion. Circuit

Rule 36 shall not apply on remand.

FOOTNOTES

/1 Under 12 U.S.C. sec. 351(h), a device is deemed

"adulterated" if the product is not manufactured,

processed, packed, or held in accordance with

"current good manufacturing practices."

/2 White replaced Burnham as chairman of the board

of directors in April 1999.

/3 A different analysis for demand futility is used

in situations where the directors did not make a

business decision which was challenged in the

derivative suit. See Rales v. Blasband, 634 A.2d

927, 933-34 (Del. 1993). The court in Rales held

that where there is "[t]he absence of board

action," the plaintiffs need not demonstrate a

reasonable probability of success on the merits,

but must present "particularized factual

allegations [which] create a reasonable doubt

that, as of the time the complaint is filed, [a

majority of] the board of directors could have

properly exercised its independent and

disinterested business judgment in responding to

a demand." Id. at 934. In McCall, the shareholder

plaintiffscharacterized the board’s failure to

take action with respect to systematic fraud

occurring in the corporation as a conscious

decision, i.e., knowingly, intentionally. 249

F.3d at 813. But the Sixth Circuit held that

where the plaintiffs’ "duty of care claims . . .

arise out of allegations of nonfeasance by the

Board (i.e., "intentional ignorance of," or

"willful blindness to" the "red flags" that were

signs of potentially fraudulent practices) and

challenge the Board’s failure to take action or

investigate under the circumstances," and which

do not allege a conscious decision to refrain

from acting, the Rales test must be applied. Id.

at 816.

 However, even if the Rales test had been

applied in the instant case, the results would be

the same, as detailed in the above-stated

analysis concerning reasonable doubt as to the

directors’ independent and disinterested status

under the business judgment rule, given the fact
that at the time demand would have been made, it

would have been to a majority of the same

directors who were in control during the six-year

period and when the consent decree was imposed.

See id. at 819 (finding that factual allegations

and reasonable inferences drawn in plaintiffs’

favor sufficient to "create a reasonable doubt as

to the disinterestedness and independence of a

majority of the directors").

/4 805 Ill. Comp. Stat. sec. 5/8.65 details

particular circumstances other than those

specified in sec. 5/2.10(b)(3), and not pertinent

to this case, when a corporate director may be

held liable.