Opinion ID: 1996638
Heading Depth: 1
Heading Rank: 15

Heading: The Legal Issues Controlling a Demand Refused Claim

Text: We next address the issue of whether the Court of Chancery applied the correct legal standard for determining the sufficiency of Levine's Amended Complaint to withstand defendant's Rule 23.1 motion to dismiss. The trial court ruled that the legal standard governing Rule 23.1 motions to dismiss demand refused cases is the same standard that governs dismissal of a demand futility case, that is, the Aronson two-part inquiry into board disinterest and independence as well as application of the tradition business judgment rule to the Board's refusal of the demand. The court thereby committed legal error. The focus of a complaint alleging wrongful refusal of demand is different from the focus of a complaint alleging demand futility. The legal issues are different; therefore, the legal standards applied to the complaints are necessarily different. A shareholder plaintiff, by making demand upon a board before filing suit, tacitly concedes the independence of a majority of the board to respond. Therefore, when a board refuses a demand, the only issues to be examined are the good faith and reasonableness of its investigation. Spiegel, 571 A.2d at 777. When a shareholder files a derivative suit asserting a claim of demand futility, hence demand excused, the basis for such a claim is that the board is (1) interested and not independent; and (2) that the transaction attacked is not protected by the business judgment rule. Aronson, 473 A.2d at 814. In contrast, Levine's complaint based on wrongful refusal of demand not only tacitly concedes lack of self-interest and independence of a majority of the Board, but expressly concedes both issues. Thus, the first part of the Aronson test did not come into play and the trial court was only required to address the application of the business judgment rule to the Board's refusal of Levine's demand.