Opinion ID: 1248926
Heading Depth: 2
Heading Rank: 3

Heading: Whether Demand Would be Futile

Text: We decline to examine whether demand would have been futile in light of the information acquired through the June 27, 2005 discovery stipulation agreement. We recognize the superior position of the District Court in addressing this issue. [5] In the interests of judicial economy, however, we write to emphasize that the applicability of the business judgment rule in board inaction cases focuses on whether the Board could not be considered disinterested (the Aronson first prong) because of the potential liability its members face. As the District Court properly noted, this standard is quite high, so that in order for demand to be excused as futile the board members must face a substantial likelihood of liability. See Rales, 634 A.2d at 936 (quoting Aronson, 473 A.2d at 815). The leading case on substantial likelihood from the Supreme Court of Delaware has stated that a board's actions must be egregious to meet this standard. See Aronson, 473 A.2d at 815. Further, the business judgment rule provides directors with a powerful presumption[], Rales, 634 A.2d at 933, 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. Aronson, 473 A.2d at 812. This standard has been oft repeated, and in some cases strengthened, in Delaware and New Jersey. See, e.g., Parnes v. Bally Entm't Corp., 722 A.2d 1243, 1246 (Del. 1999) (The presumptive validity of a business judgment is rebutted in those rare cases where the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith. (quotation omitted)). In light of the business judgment presumption as well as the standard for demand futility in board inaction cases, the District Court on remand must inquire into whether the after-acquired information, as well as the information contained in the initial complaint, supports the position that the Board recklessly ignored a well-established link between VIOXX and increased cardiovascular risk to establish that the Board acted egregiously or in bad faith. Because the plaintiffs do not challenge the District Court's conclusion that the original complaint's allegations were patently conclusory, the question before the District Court will be whether the additions permitted by virtue of this opinion will transform the complaint from patently conclusory to a complaint that establishes to a sufficient degree of particularity that the March 2004 Directors approved, participated in, or caused Merck to make strategic decisions regarding the marketing of VIOXX. [6] We also write to state that the District Court properly distinguished In re Tower Air, Inc., 416 F.3d 229 (3d Cir.2005) from facts alleged in the plaintiffs' unamended complaint in this case. In Tower Air, we reversed the dismissal of a breach of fiduciary duty claim where the company's officers did nothing when they were told by the corporate Director of Safety of quality assurance problems with aircraft maintenance and of failures to record maintenance and repair work. Whether the officers' behavior is construed as an egregious decision or as unconsidered inaction, that allegation is troubling. Under no circumstances should aircraft maintenance problems be ignored. Lives are on the line. . . . We can imagine few things more egregious. The officers' alleged passivity in the face of negative maintenance reports seems so far beyond the bounds of reasonable business judgment that its only explanation is bad faith. Id. at 239. The plaintiffs analogize the facts of Tower Air to the present matter, asserting that the Board, by knowing the cardiovascular risks of VIOXX, put lives on the line in an egregious manner. This analogy is legally and factually inapposite. With respect to the legal distinctions, Tower Air did not deal with demand futility and applied a notice pleading standard under Federal Rule of Civil Procedure 8 instead of the heightened factual pleading standard under Federal Rule of Civil Procedure 23.1. This Court in Tower Air suggested that a director or officer acts egregiously and in bad faith when the director or officer's passivity/inaction/nonfeasance in the face of a known and obvious risk results in a potentially life threatening situation. Here, the situation is factually different. As explained by the District Court First, the safety concerns in Tower Air were brought to the attention of the officers controlling the company's management and operations. Ignoring safety risks can be more easily characterized as egregious where the information lies in the hand of those officers involved in actually running the corporation on a day to day basis, as opposed to a group of predominantly outside directors with little involvement in the operations of the corporation. Second, there is a significant difference between the safety warnings given to the officers in Tower Air, and those allegedly before Merck's Board. The safety information provided to the officers in Tower Air revealed documented problems with aircraft maintenance and repair work. These reports were unquestionably negative and illustrated serious risks to public safety. In re Merck & Co., Inc., 2006 WL 1228595, at  n. 5 (emphasis added). Of course, we express no opinion about whether the newly acquired facts that are included in the amended complaint will alter this analysis. The District Court will, on remand, examine whether the plaintiffs' allegations show that the Board knew that VIOXX caused cardiovascular harm and then chose to do nothing about it. The allegations must not simply demonstrate an aloof or negligent Board, but nonfeasance that rose to the level of egregiousness or bad faith.