Opinion ID: 2210245
Heading Depth: 3
Heading Rank: 1

Heading: Background law regarding independence.

Text: In ruling that PRC-Iowa properly refused Whalen's demand, the district court stated that, pursuant to Delaware law, Whalen conceded the independence and disinterest of the board by making demand on the PRC-Iowa board. Whalen asserts this was error. Under Delaware corporations law, a shareholder who elects to make a demand upon the board of directors concedes or waives the right to challenge the independence of a majority of the board to respond to the demand. See Seaford Funding, 672 A.2d at 71; Spiegel, 571 A.2d at 777. This rule is sometimes referred to as the corporate concession rule. See Seaford Funding, 672 A.2d at 71. In Seaford Funding the Delaware court of chancery refused to apply the corporate concession rule to a limited partner's derivative action against the general partner, a corporation. See id. at 71-72. The chancery court noted that the demand requirement promotes judicial efficiency by forcing a stockholder to exhaust its intra-corporate remedies, encourages intra-corporate solutions to internal problems and bars meritless claims of self-interested decision making. See id. The court reasoned, however, that the demand requirement, as applied to the facts in Seaford Funding, fails to promote judicial efficiency at least when there is a single general partner that is enveloped in a self-spun web of conflicting interests. Id. The court thus concluded that the limited partners' pre-suit demand did not constitute a concession that the general partner acted independently. Id. at 72. Whalen relies on Seaford Funding as support for his claim that he did not concede the independence or disinterest of the board by making pre-suit demand. There appear to be no later Delaware cases discussing Seaford Funding and its statement concerning application of the corporate concession rule to limited partnerships. One commentator, however, has stated that the court of chancery's holding in Seaford Funding may be limited to its specific facts and, at least where a limited partnership has multiple general partners or a single general partner that is a business entity such as a corporation, the corporate analogy of concession of independence when demand is made may be applied to limited partnerships in proper circumstances. Lubaroff and Altman, § 10.3, at 10-12. In Scattered Corp. v. Chicago Stock Exchange, a case decided after Seaford Funding, the Delaware supreme court commented on whether making a demand on a board of directors concedes independence of the board in derivative suits. See 701 A.2d at 74-75. [7] Scattered Corp. involved a stockholder derivative suit against the Chicago Stock Exchange of which plaintiffs, one a corporation and the other an individual, were members. Id. at 71. Plaintiffs made pre-suit demand upon the Board of Governors of the Exchange, alleging various misdeeds by board members. Id. In response to the demand, an executive committee of the board appointed a special committee consisting of past and current board members to investigate the allegations made in plaintiffs' demand. Id. The special committee retained independent counsel to assist it in the investigation. Id. Upon completion of its investigation, the special committee recommended that no further action be taken concerning plaintiffs' demand and the executive committee adopted the special committee's recommendation. Id. at 71-72. After plaintiffs filed a derivative action against the board, the court of chancery granted defendants' motions to dismiss, holding that plaintiffs' complaint failed to plead with particularity facts sufficient to create a reasonable doubt that the executive committee of the board had properly refused plaintiffs' pre-suit demand. Id. at 72. The court of chancery also stated that, by making a demand on the board, plaintiffs conceded the disinterestedness of both the full board and the executive committee. Id. at 74. On appeal, plaintiffs argued that the court of chancery erred in concluding that a demand on an independent board of directors concedes the independence of an executive committee of the board. Plaintiffs also argued that it was improper for the executive committee, instead of the full board, to act on the recommendation of the special committee to refuse the demand. At the beginning of the opinion, the Delaware supreme court stated: [W]e explicate the settled legal principles as they apply to these specific facts, holding that the making of a demand waives only any contention that the board was incapable of acting on the demand. A demand does not preclude a plaintiff from alleging with particularity facts creating a reason to doubt that a special committee in investigating the demand or the executive committee of the board in acting on the demand acted independently and in good faith or conducted a reasonable investigation. Id. at 71 (emphasis added). Later in the opinion, the court stated: In a derivative action involving refusal of a demand, any alleged bias or self-interest on the part of the board or a committee authorized to act on that demand should become part of the court's inquiry into whether the board or committee acted independently and in good faith, or whether it concluded a reasonable investigation. Id. at 75 (emphasis added). Applying these principles, the Delaware supreme court affirmed the court of chancery's decision that plaintiffs failed to allege with particularity facts creating a reasonable doubt concerning whether the executive committee acted independently or was disinterested, see id., or whether the investigation of the demand was reasonable and conducted in good faith. Id. at 77. The court noted that the board appointed the executive committee pursuant to Delaware Code Annotated title 8, section 141(c), which permits a board of directors to pass a resolution designating one or more committees that may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation. Id. at 75. In doing so, the court rejected plaintiffs' contention that the full board, by beginning an investigation and by appointing the special committee, reserved to itself the job of making an informed decision on the demand and thus only the board, not the executive committee, had the authority to reject plaintiffs' demand. Id. at 76. The court also rejected plaintiffs' contention that the dispute as to which body appointed the special committee, the full board or the executive committee, raised a strong inference that the executive committee was trying to protect committee members who were named as wrongdoers in the demand. Id. at 77.