Opinion ID: 2633558
Heading Depth: 1
Heading Rank: 9

Heading: When the alleged wrongs constitute a business decision by the board of directors

Text: In Aronson, a 1984 case, the Delaware Supreme Court examined whether making a demand on a board of directors was excused merely because the shareholder plaintiff alleged that the board participated in the wrongdoing and consequently was automatically considered partial or guilty. [36] That court concluded that allegations of mere participation in the wrongdoing are insufficient to excuse the demand requirement because, in making a business decision, disinterested directors may invoke the business judgment rule's protections. [37] In other words, even a bad decision is generally protected by the business judgment rule's presumption that the directors acted in good faith, with knowledge of the pertinent information, and with an honest belief that the action would serve the corporation's interests. [38] In explaining how the business judgment rule presumption operates, the Aronson court first noted that only disinterested directors can claim its protections. [39] Then, if that threshold is met, the business judgment rule presumes that the directors have complied with their duties to reasonably inform themselves of all relevant, material information and have acted with the requisite care in making the business decision. [40] Consequently, a plaintiff challenging a business decision and asserting demand futility must sufficiently show that either the board is incapable of invoking the business judgment rule's protections ( e.g., because the directors are financially or otherwise interested in the challenged transaction) or, if the board is capable of invoking the business judgment rule's protections, that that rule is not likely to in fact protect the decision ( i.e., because there exists a possibility of overcoming the business judgment rule's presumptions that the requisite due care was taken when the business decision was made). [41] Of course, since approval of a transaction by the majority of a disinterested and independent board usually bolsters the presumption that the transaction was carried out with the requisite due care, [i]n such cases, a heavy burden falls on a plaintiff to avoid presuit demand. [42] The Aronson court accordingly concluded that a two-pronged demand futility analysis applies to determine if a complaint has created a reasonable doubt as to whether the directors, having made a business decision, were disinterested and independent, or likely entitled to the business judgment rule's protection: [I]n determining demand futility[,] the [trial court] . . . must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. [43] Under the Aronson test's first prong, the demand requirement is excused without further inquiry if the complaint's allegations, taken as true and with all fair inferences drawn in favor of the plaintiff, show that the protection afforded by the business judgment rule is inapplicable to the board majority approving the transaction because those directors are interested, or are controlled by another who is interested, in the subject transaction (that has not been otherwise approved by the shareholders). [44] For example, a director who has divided loyalties in relation to, or who has or is entitled to receive specific financial benefit from, the subject transaction, is an interested director. [45] Control refers to the influences upon the directors' performance of their duties generally, and more specifically in respect to the challenged transaction. [46] The second prong of the Aronson test for demand futility is implicated only if the business judgment rule remains applicable because a majority of directors are disinterested or independent of one who is interested under the first prong. [47] When undertaking analysis under the second prong of the Aronson test to determine if the complaint's particularized facts raise a reasonable doubt as to the challenged transaction constituting a valid exercise of business judgment, the alleged wrong is substantively reviewed against the factual background alleged in the complaint. [48]