Source: https://www.pbwt.com/ny-commercial-division-blog/business-judgment-rule-applies-to-a-boards-response-to-take-all-necessary-actions/
Timestamp: 2019-04-21 19:06:25+00:00

Document:
What legal standard applies to assess a corporate board’s refusal to pursue litigation in response to a shareholder’s demand to take “all necessary actions” to correct alleged director misconduct? In Solak v. Fundaro,[i] Commercial Division Justice Charles Ramos applied the business judgment rule to such a situation, holding that a request to take “all necessary actions” constitutes as a shareholder demand under Rule 23.1 of the Delaware Chancery Court Rules and that a derivative plaintiff must plead particularized facts showing gross negligence or bad faith to proceed with a derivative claim following a board’s refusal to take the demanded action.
The dispute in Solak concerned the compensation of non-employee directors of Intercept Pharmaceuticals, Inc. In 2016, Intercept’s Board of Directors adopted a non-employee director compensation policy that provided for various cash and stock compensation for its directors. This policy was not submitted to the company’s shareholders for approval.
Solak then filed a derivative suit on behalf of Intercept against the nine members of the Board. The suit alleged breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The Board members moved to dismiss the claims.
The court found that the first two requirements were expressly met by the plain text of the Letter. As to the third requirement, although the Letter did not specifically request that the Board file a lawsuit, it did “demand that the Board take all action necessary actions [sic]” and noted that, if the Board did not act within 30 days, Solak would consider “available actions and remedies in order to compel the Board to act for the benefit of Intercept and its shareholders.”[viii] The court concluded that “all necessary actions” included any available legal actions and thus the Letter was therefore a Rule 23.1 demand.
Having concluded that a Rule 23.1 demand was made, the court then turned to the question of what legal standard governed the Board’s actions.
Justice Ramos held in Solak that a corporate board’s response to a demand for “all necessary” action will be accorded the deference of the business judgment rule unless a plaintiff can come forward with specific facts showing bad faith or gross negligence. In so holding, the court refused to adopt the view that a Rule 23.1 demand must specify exactly what actions are requested by the objecting shareholder.
[i] Solak v. Fundaro, No. 655205/2017, 2018 BL 104975 (N.Y. Sup. Ct. Mar. 19, 2018).
[vii] Id. at *3-4 (quoting Yaw v. Talley, No. Civ. 12882, 1994 Del. Ch. LEXIS 35, at *22-23 (Del. Ch. Ct. Mar. 2, 1994) (citing Allison v. General Motors Corp., 604 F. Supp. 1106, 1117 (D. Del 1985)).
[xi] Id. at *5 (quoting Friedman v. Maffei, C.A. No. 11105, 2016 Del. Ch. 63, at *24 (Del. Ch. Ct. Apr. 13, 2016)).
[xii] Id. at *5 (quoting In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006)).
[xiii] Id. at *5 (citing Andersen v. Mattel, Inc., C.A. No. 11816, 2017 Del. Ch. LEXIS 12, at *8 (Del. Ch. Ct. Jan. 19, 2017).
[xiv] Id. at *5 (quoting Friedman, 2016 Del. Ch. 63, at *24).
[xv] Id. at *5 (quoting Ironworkers Dist. Council v. Andreotti, C.A. No. 9714, 2015 Del. Ch. LEXIS 135, at *89 (Del. Ch. Ct. May 8, 2015), aff’d, 132 A.3d 748 (Del. 2016)).
[xvi] Id. at *5 (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993)).
[xix] Id. at *6 (citing Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 985 (Del. Ch. 2000)).
[xxi] Id. at *7 (quoting Andreotti, 2015 Del. Ch. LEXIS 135, at *89).

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