Opinion ID: 1955244
Heading Depth: 1
Heading Rank: 4

Heading: Demand Made/Futility Waived

Text: Spiegel filed a derivative action on behalf of Waste Management, alleging that a presuit demand on the Board was excused, i.e., would have been a futile gesture. However, Spiegel then filed a demand with the Board to take legal action and redress the wrongs set forth in his complaint. Spiegel alleges that he was entitled to simultaneously argue these inconsistent arguments. The Board argues that when Spiegel filed his demand, he waived his right to continue asserting that demand was excused. The Court of Chancery gave implicit recognition to the validity of Spiegel's position by examining the merits of both of his arguments. [15] When deciding a motion to dismiss for failure to make a demand under Chancery Rule 23.1 the record before the court must be restricted to the allegations of the complaint. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 727-28. See also Grobow v. Perot, 539 A.2d at 187; Pogostin v. Rice, 480 A.2d at 622-24; Aronson v. Lewis, 473 A.2d at 809. In determining demand futility, the Court of Chancery must decide whether, under the particularized facts alleged in the complaint: [A] reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Aronson v. Lewis, 473 A.2d at 814. In this case, the Court of Chancery concluded that the facts alleged in Spiegel's complaint did not raise a reasonable doubt that the Board was disabled from responding to Spiegel's demand and passing upon whether it was in Waste Management's interest to pursue Spiegel's claims. Spiegel argues that, even though he made a demand, the Court of Chancery properly reviewed the merits of his complaint, which alleged that demand was excused. Spiegel submits that demand should be encouraged by permitting a demand to be made, while at the same time permitting the argument, that demand was excused, to be preserved. Spiegel finds some support for his position in other jurisdictions. See Bach v. National W. Life Ins. Co., 810 F.2d 509, 513 (5th Cir.1987); Joy v. North, 692 F.2d 880, 888 n. 7 (2d Cir.1982), cert. denied, 460 U.S. 1051, 103 S.Ct. 1498, 75 L.Ed.2d 930 (1983); Alford v. Shaw, 72 N.C.App. 537, 324 S.E.2d 878, 883 n. 2 (1985), aff'd and modified on other grounds, 320 N.C. 465, 358 S.E.2d 323 (1987). However, this Court has held that by making a demand, a shareholder thereby makes his original contention, that demand was excused, moot. Stotland v. GAF Corp., Del.Supr., 469 A.2d 421 (1983). In Stotland, the shareholders' original derivative complaint did not allege that a demand had been made on the corporation's board of directors. The Court of Chancery denied the shareholders' motion to amend their complaint, and ordered the action dismissed due to the shareholders' failure either to make a demand or properly demonstrate its futility. Id. at 422. Following the dismissal, the shareholders made a demand on the board, and then filed an appeal from the dismissal, on grounds that a demand would have been futile. The board of directors appointed a special litigation committee to review the demand. That process was still in progress at the time when the shareholders' appeal was heard by this Court. We concluded that, by making the demand, the shareholder mooted his appeal, which was based on the issue of demand futility. We held that once a demand has been made, absent a wrongful refusal, the stockholders' ability to initiate a derivative suit is terminated. Id. at 422 (citing Zapata Corp. v. Maldonado, 430 A.2d at 784-86). This Court has recently held that when a board of directors is confronted with a derivative action asserted on its behalf, it cannot stand neutral. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 731. The Board must affirmatively object to or support the continuation of the [derivative] litigation. Id. Similarly, a stockholder who asserts a derivative claim cannot stand neutral, in effect, with respect to the board of directors' ability to respond to a request to take legal action, by simultaneously making a demand for such action and continuing to argue that demand is excused. By making a demand, a stockholder tacitly acknowledges the absence of facts to support a finding of futility. Cf. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 731. Thus, when a demand is made, the question of whether demand was excused is moot. Stotland v. GAF Corp., 469 A.2d at 422-23. Our decision in Stotland is applicable to Spiegel's case. Therefore, we hold once Spiegel made a demand, it was unnecessary for the Court of Chancery to consider the merits of Spiegel's argument that demand was excused. Id. at 423. A shareholder who makes a demand can no longer argue that demand is excused. Id. [16] The effect of a demand is to place control of the derivative litigation in the hands of the board of directors. Zapata Corp. v. Maldonado, 430 A.2d at 784-86. [17] Consequently, stockholders who, like Spiegel, make a demand which is refused, subject the board's decision to judicial review according to the traditional business judgment rule. Aronson v. Lewis, 473 A.2d at 813; Zapata Corp. v. Maldonado, 430 A.2d at 784 n. 10.