Opinion ID: 1927497
Heading Depth: 1
Heading Rank: 4

Heading: Effect of Action by Executive Committee

Text: The second issue inherent in plaintiffs' appeal is that the Executive Committee, not the full board, acted on the Special Committee's recommendation and refused the demand. 8 Del. C. § 141(c) 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. [20] The Exchange has done this by appointing the Executive Committee and by allowing that committee to review the investigation by the Special Committee and to decide whether or not to refuse plaintiffs' pre-suit demand. 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 conducted a reasonable investigation. If there had been particularized allegations that the Special Committee (as the investigating committee) or the Executive Committee (as the decisionmaking committee) was biased, lacked independence, or failed to conduct a reasonable investigation, such allegations could have created a reasonable doubt that demand was properly refused. [21] That is not present in the pleading before us. In the case sub judice, we find no basis to disagree with the conclusion of the Court of Chancery that plaintiffs' claims that a reasonable doubt exists that the Executive Committee acted independently or that the Executive Committee was disinterested are not alleged with particularity. Finally, plaintiffs' facts creating a reasonable doubt about the disinterestedness and independence of the Executive Committee are not facts at all. Rather, they are conclusory and speculative statements, suffering fatally from a paucity of particularization. [22] Such conclusory statements will not suffice to cast a reasonable doubt upon the disinterestedness, good faith or reasonableness of the Executive Committee in acting on the demand. [23] The Court of Chancery noted the following when it considered the good faith and reasonableness of the investigation into plaintiffs' complaint: (a) the creation of the Special Committee; (b) the fact that it interviewed 25 people as well as other people the plaintiffs had suggested would corroborate their claims of wrongful conduct; (c) the findings by the Special Committee that claims made in the demand were unsubstantiated; and (d) the conclusion by the Executive Committee, after careful consideration [24] of the Special Committee's investigation, that there is no basis on which it could or should take action with respect to plaintiffs' allegations. [25] Based on the foregoing actions taken by the Special Committee and the Executive Committee, the Court of Chancery concluded that [n]one of the particularized pleaded facts supports the plaintiffs' claim that the Executive Committee violated its duty of care by relying upon the Special Committee's investigation.... To the contrary, the pleaded facts confirm that the Executive Committee's decision was the product of a valid exercise of business judgment. [26] In its opinion after remand and after it became known that the full Board rather then the Executive Committee appointed the Special Committee to conduct the investigation into plaintiffs' complaint, the Court of Chancery concluded that the new fact is immaterial to the reasoning or result reached in this Court's July 12, 1996 Opinion. That is because on the dismissal motion the only legal issue was whether the complaint alleged particularized facts creating a reason to doubt that the investigation of the demand was reasonable and conducted in good faith. The investigation was conducted by the Special Committee. Whether the Special Committee was created by the Executive Committee (as originally assumed) or by the full Board (the new fact) has no logical or legal bearing on that issue. [27] Plaintiffs give two reasons why this Court should find the Court of Chancery's decisions erroneous. First, plaintiffs contend that the full Board, by beginning an investigation and by appointing the Special Committee, may have reserved to itself the job of making an informed decision on the demand. If this is true, plaintiffs continue, then it is reasonable to infer that the Executive Committee did not have the authority to reject plaintiffs' demand because the Executive Committee cannot exercise those powers reserved to the full Board. The Court of Chancery responded to plaintiffs' argument as follows: I conclude that the inference that plaintiffs seek to have drawn from the new fact is neither logically nor legally permissible, and in any event is not a reasonable inference. Because that inference forms the entire basis for the plaintiffs' argument, that argument fails. [28] We agree. Second, plaintiffs argue that the discrepancy in the record over which body appointed the Special Committee, the full Board or the Executive Committee, raises a strong inference that the Executive Committee was covering up its real purpose of protecting committee members Livingston and Fletcher, who were named wrongdoers in the demand. Plaintiffs concede that the importance of that misrepresentation [that the Executive Committee rather than the full Board appointed the Special Committee] depends upon facts that are not in the record.... Yet the Court of Chancery stated, There is no basis to infer from that single fact, or from the timing or other circumstances of its disclosure, that it exemplified a larger group of other misrepresented facts. . . . If plaintiffs had a factual basis to dispute Mr. Schulze's statements [made in the letter refusing plaintiffs' demand], their obligation was to plead those facts in their complaint and rely on them when opposing defendant's motion to dismiss. If plaintiffs had no such contrary facts, they cannot fill the gap by offering up improper inferences as a substitute. [29] Similarly, this Court has stated, Rule 23.1's command that a derivative complaint `allege with particularity the efforts ... made by the plaintiff to obtain the action [the plaintiff] desires from the directors ... and the reasons for [the plaintiff's] failure to obtain the action ...' cannot be parsed to permit conclusory reasons alone to suffice. [30] We find plaintiffs have failed to satisfy the requirements of Rule 23.1 in that they have not carried their burden of alleging in their complaint particularized facts creating a reason to doubt that the investigation of the demand was reasonable and conducted in good faith. Accordingly, we find no basis for disturbing the conclusions made by the Court of Chancery. Its decisions both before and after remand are well-reasoned and firmly rooted in settled law. Thus, we hold that the Court of Chancery did not abuse its discretion when it granted the defendants' motion to dismiss based upon plaintiffs' failure to comply with Court of Chancery Rule 23.1.