Opinion ID: 3159684
Heading Depth: 2
Heading Rank: 1

Heading: Delaware’s Response to our Certified Question

Text: “We receive the response to our certification ‘bearing in mind that the highest court of a state has the final word on the meaning of state law.’” Engel v. CBS, Inc., 182 F.3d 124, 125 (2d Cir. 1999) (quoting Cty. of Westchester v. Comm’r of Transp., 9 F.3d 242, 245 (2d Cir. 1993)). The adequacy of a complaint alleging wrongful refusal of a stockholder demand is determined under the law of the state of incorporation, here, Delaware. See RCM Sec. Fund, Inc. v. Stanton, 928 F.2d 1318, 1326 (2d Cir. 1991). 5 As we noted in our previous opinion certifying a question to the Delaware Supreme Court, and as the Delaware Supreme Court emphasized in its response, our review of a wrongful refusal suit starts from the premise that the decision to initiate a lawsuit is an internal corporate matter within the board’s discretion. Any plaintiff attempting to bring a derivative suit therefore bears the “difficult” burden to plead facts sufficient to rebut the strong presumption that the board’s decision not to take action was a valid exercise of its business judgment. Delaware Response at . As the Delaware Supreme Court discussed in Aronson v. Lewis: The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under [Del. Code Ann. tit. 8, §] 141(a). It 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. Absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption. 473 A.2d 805, 812 (Del. 1984) (citations omitted), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 253 (Del. 2000). The Delaware Supreme Court’s response to our certified question also underscores that the subject of our review is not the merits of JPMorgan’s decision to refuse Espinoza’s demand; rather, we consider only whether the plaintiff has 6 pleaded sufficient facts to suggest that the board’s decision was unreasonable or not made in good faith, in the context of all of the factors that the board had to consider. See Delaware Response at  (“Delaware law on the relevant topic is settled, and requires that the decision of an independent committee to refuse a demand should only be set aside if particularized facts are pled supporting an inference that the committee, despite being comprised solely of independent directors, breached its duty of loyalty, or breached its duty of care, in the sense of having committed gross negligence.”); id. at  n.10 (“[T]o survive a motion to dismiss, the plaintiff stockholder asserting wrongful refusal of a demand must allege with particularity in the complaint facts that give rise to a reasonable doubt as to the good faith or reasonableness of that investigation.’” (quoting Wolfe & Pittenger, Corporate and Commercial Practice in the Del. Court of Chancery § 9.02[b][3], at 9–108 (Matthew Bender & Co. 2013)). This approach is consistent with the view of Delaware courts that judges are ill‐suited to second‐guess board decisions. See In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 124 (Del. Ch. 2009) (observing that Delaware’s focus on the “decision‐making process rather than on a substantive evaluation of the merits of the decision . . . follows 7 from the inadequacy of the Court, due in part to a concept known as hindsight bias, to properly evaluate whether corporate decision‐makers made a ‘right’ or ‘wrong’ decision”) (footnote omitted). Accordingly, to meet his burden at the motion to dismiss stage, a plaintiff alleging wrongful refusal of a demand must plead facts supporting a plausible inference that the board’s decision not to take action was a result of gross negligence, defined under Delaware law as “conduct that constitutes reckless indifference or actions that are without the bounds of reason.” McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008). As this Court has noted, “few, if any, plaintiffs surmount this obstacle.” RCM Sec. Fund, Inc., 928 F.2d at 1328.