Opinion ID: 2360416
Heading Depth: 1
Heading Rank: 8

Heading: Validly in Litigation

Text: In Harris v. Carter , the Court of Chancery held that the existence of an independent board of directors is relevant to a Rule 23.1 demand inquiry but only with respect to derivative claims not already validly in litigation. [25] The Court of Chancery recognized that under section 141(a) the board of directors had a right and duty to control corporate litigation and that Rule 23.1 was designed to ensure that through derivative suits shareholders do not improperly seize corporate powers. [26] The Court of Chancery concluded, however, that Rule 23.1 ought not to be so construed as to stall the derivative suit mechanism where it has been properly initiated or to interrupt litigation. [27] Accordingly, the Court of Chancery stated: When claims have been properly laid before the court and are in litigation, neither Rule 23.1 nor the policy it implements requires that a court decline to permit further litigation of those claims upon the replacement of the interested board with a disinterested one. . . . . [S]ome tribute must be paid to the fact that the lawsuit was properly initiated.    A rule that recognizes the power to amend or supplement a well-instituted derivative suit without recourse to Rule 23.1, does not acknowledge a shareholder right to institute new corporate claims against an existing defendant. . . after a disinterested board takes control of the corporation. Rather it limits the representative plaintiff's ability (without independent justification under Rule 23.1) to amend and supplement pleadings to those that relate to claims already in litigation. However, claim for these purposes does not refer simply to legal theories of liability but refers broadly to the acts and transactions alleged in the original complaint. Thus, an amendment or supplement to a complaint that elaborates upon facts relating to acts or transactions alleged in the original pleading, or asserts new legal theories of recovery based upon the acts or transactions that formed the substance of the original pleading, would not, in my opinion, constitute a matter that would require a derivative plaintiff to bring any part of an amended or supplemental complaint to the board prior to filing. [28] We agree. As the Court of Chancery recognized in Harris v. Carter , there are several legal options that protect the section 141(a) statutory power of a board to manage the corporation's business and affairs. [29] When a derivative action is pending, a board comprised of new directors who are under no personal conflict with respect to prosecution of a pending derivative claim . . . may cause the corporation to act in a number of ways with respect to that litigation. [30] For example, the new board can take control of the litigation by becoming realigned as the party plaintiff; move to dismiss the action as not in the corporation's best interest; permit the plaintiff to carry the litigation forward; or appoint a special litigating committee to determine what action to take. Accordingly, we also conclude that: when during the pendency of a derivative litigation there occurs a change in the composition of a board that had been disabled by conflict, and the board as newly constituted is capable of validly exercising judgment concerning that corporate claim, it has sufficient avenues open to it to meet its Section 141(a) responsibilities. There are good reasons not to go further and require that a derivative plaintiff interrupt litigation, when amending his pleading or otherwise, to make a demand upon such a newly constituted board. [31] We hold that, when an amended derivative complaint is filed, the existence of a new independent board of directors is relevant to a Rule 23.1 demand inquiry only as to derivative claims in the amended complaint that are not already validly in litigation. [32] Three circumstances must exist to excuse a plaintiff from making demand under Rule 23.1 when a complaint is amended after a new board of directors is in place: first, the original complaint was well pleaded as a derivative action; second, the original complaint satisfied the legal test for demand excusal; and third, the act or transaction complained of in the amendment is essentially the same as the act or transaction challenged in the original complaint. [33] A fortiori for Rule 23.1 demand purposes, we hold a complaint that has been dismissed is not validly in litigation. A complaint that is dismissed without prejudice but with express leave to amend is nevertheless a dismissed complaint. It constitutes a judicial determination that the original complaint was either not well pleaded as a derivative action or did not satisfy the legal test for demand excusal. Following such a dismissal, for purposes of a Rule 23.1 demand inquiry, the complaint is not validly in litigation. Consequently, where a complaint is amended with permission following a dismissal without prejudice, even if the act or transaction complained of in the amendment is essentially the same conduct that was challenged in the original dismissed complaint, the Rule 23.1 demand inquiry must be assessed by reference to the board in place at the time when the amended complaint is filed. After the Plaintiff's First Amended Complaint was dismissed in its entirety, there were no claims validly in litigation. Consequently, the Court of Chancery should have assessed demand futility regarding Count I of the Second Amended Complaint with regard to the board that was in place at the time that amendment was filed. Where, as in this proceeding, a plaintiff's complaint has been dismissed and the plaintiff is given leave to file an amended complaint, we hold that the plaintiff must make a demand on the board of directors in place at that time the amended complaint is filed or demonstrate that demand is legally excused as to that board.