Opinion ID: 1996638
Heading Depth: 1
Heading Rank: 10

Heading: Whether Plaintiffs' New Complaint Establishes Futility of Demand

Text: We take up the remaining question in Grobow II: whether the Court of Chancery correctly ruled that plaintiffs' claims based on newly discovered evidence were insufficient to establish the futility of a demand so as to require the dismissal of plaintiffs' Second Amended Complaint under Rule 23.1. Court of Chancery Rule 23.1 provides, in pertinent part: The complaint [shall] ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort. As we stated at the outset ( see supra II-A), the demand requirements of Rule 23.1 are predicated upon the application of the business judgment rule in the context of a board of directors' exercise of its managerial power over a derivative claim. In determining the sufficiency of a complaint to withstand dismissal under Rule 23.1 based on a claim of demand futility, the controlling legal standard is well established. The trial court is confronted with two related but distinct questions: (1) whether threshold presumptions of director disinterest or independence are rebutted by well-pleaded facts; and, if not, (2) whether the complaint pleads particularized facts sufficient to create a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. See Grobow I, 539 A.2d at 187-188; Aronson, 473 A.2d at 814-815; Zapata, 430 A.2d at 782-784. The premise of a shareholder claim of futility of demand is that a majority of the board of directors either has a financial interest in the challenged transaction or lacks independence or otherwise failed to exercise due care. Grobow I, 539 A.2d at 186, 188; Aronson, 473 A.2d at 814. On either showing, it may be inferred that the Board is incapable of exercising its power and authority to pursue the derivative claims directly. When lack of independence is charged, a plaintiff must show that the Board is either dominated by an officer or director who is the proponent of the challenged transaction or that the Board is so under his influence that its discretion is sterilize[d]. Zapata, 430 A.2d at 784 (quoting McKee v. Rogers, Del. Ch., 156 A. 191, 193 (1931)); Sohland v. Baker, Del.Supr., 141 A. 277 (1927). Assuming a plaintiff cannot prove that directors are interested or otherwise not capable of exercising independent business judgment, a plaintiff in a demand futility case must plead particularized facts creating a reasonable doubt as to the soundness of the challenged transaction sufficient to rebut the presumption that the business judgment rule attaches to the transaction. The point is that in a claim of demand futility, there are two alternative hurdles, either of which a derivative shareholder complainant must overcome to successfully withstand a Rule 23.1 motion. In addressing plaintiffs' restated claim of demand futility, the Vice Chancellor correctly limited his threshold analysis to the issue of director independence. We decline to revisit plaintiffs' repleaded allegation that the GM Directors, in approving the Perot buy-out, acted out of motives of entrenchment or financial self-interest. We also decline to reconsider plaintiffs' allegations that the buy-out represented a waste of corporate assets. We fully addressed those issues in Grobow I, 539 A.2d at 188-191; and, as we have already ruled, those issues were clearly not the basis upon which the Vice Chancellor premised the grant of Rule 60(b) relief. Plaintiffs' remaining allegations, offered to sustain a claim of demand futility, are that the GM outside directors lacked independence because they were deceived or misled by management or inside directors concerning the true purpose of the Perot buy-out and the substantial progress that had been made in resolving the ongoing disputes between GM and EDS. Plaintiffs claim that the GM outside directors were so manipulated, misinformed and misled that they were subject to management's control and unable to exercise independent judgment. Plaintiffs assert that their restated complaint pleads with sufficient particularity the manner in which the GM outside directors, though they comprise the majority of the Board, were dominated and controlled by its management directors. As a result, plaintiffs allege that the outside directors' independence was thereby destroyed and they were effectively dominated by the management directors. [4] The Court of Chancery found that plaintiffs' restated claim of demand futility failed to plead particularized facts sufficient to create a reasonable doubt as to the independence of a majority of the GM Board. The court found that plaintiffs' claims based on newly discovered evidence implicated, at most, only two of GM's fourteen outside directors, thereby leaving at least twelve of the twenty-one directors (excluding Perot) independent and capable of impartially considering a demand. The court also found any alleged deception concerning the placement of blame for the GM/EDS disputes immaterial to the fundamental decision of severing the GM-Perot relationship. Hence, the court found plaintiffs' Second Amended Complaint to have inadequately pleaded a claim of futility of demand. Our standard of review of the Court of Chancery's finding that plaintiffs have not pleaded particularized facts sufficient to excuse demand is for abuse of discretion in the determination of a predominantly factual issue. Grobow I, 539 A.2d at 186; Aronson, 473 A.2d at 815. The demand requirement is not a mere formalit[y] of litigation, but rather an important stricture[] of substantive law. Tandycrafts v. Initio Partners, 562 A.2d at 1166. Plaintiffs' pleading burden under Rule 23.1 is also more onerous than that required to withstand a Rule 12(b)(6) motion to dismiss. Grobow I, 539 A.2d at 187 n. 6; see also Allison on Behalf of General Motors Corp. v. General Motors Corp., 604 F.Supp. 1106, 1112 (D.Del.) (Rule 23.1 represents a marked departure from the `notice' pleading philosophy governing the Federal Rules of Civil Procedure), aff'd mem., 782 F.2d 1026 (3d Cir.1985). Conclusory allegations of fact or law [which are] not supported by allegations of specific fact may not be taken as true. Grobow I, 539 A.2d at 187. On the other hand, plaintiffs are not required to plead evidence inasmuch as discovery is foreclosed. Pogostin, 480 A.2d at 625. We affirm the Vice Chancellor's findings that plaintiffs have failed to meet their burden of adequately pleading a claim of demand futility based on lack of independence of GM's outside directors. The trial court's findings are supported by the record and cannot be found to constitute an abuse of discretion. Plaintiffs' conclusory allegations that the outside directors' independence was compromised by the inside directors' misleading, manipulative and deceptive conduct are unsupported by particularized facts. Such allegations of improper conduct by management are also inadequate to establish Board domination or control of GM's outside directors sufficient to find the latter lacking in independence, in the customary definition of the term. See Aronson, 473 A.2d at 815-816; Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119, 123 (1971); McKee v. Rogers, 156 A. at 193. Plaintiffs' allegations detailed in paragraphs 56 and 57 of their restated complaint more appropriately relate to the issue of director due care and the business judgment rule's application to the challenged transaction. Indeed, plaintiffs plead virtually the same averments for both purposes. The question then becomes whether the restated Grobow complaint otherwise pleads particularized facts sufficient to rebut the presumption that the Perot buy-back was the product of a valid exercise of business judgment. As we stated in Spiegel, the business judgment rule is a presumption that in making a business decision, not involving self-interest, 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. Spiegel, 571 A.2d at 774 (citing Grobow I, 539 A.2d at 187 and Aronson, 473 A.2d at 812). If a board's decision can be attributed to any rational business purpose, Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971), a court will not substitute its judgment for that of a board. When the challenged transaction is approved by a board, the majority of whom are outside, nonmanagement directors, a heavy burden falls on [plaintiffs] to avoid presuit demand. Grobow I, 539 A.2d at 190. We have previously ruled that the Court of Chancery properly refused to reapply its demand futility analysis to plaintiffs' claims of director self-interest, entrenchment and waste. Thus, the trial court properly confined its remaining demand futility analysis to whether plaintiffs' restated complaint pleads particularized facts sufficient to create a reasonable doubt that GM's outside directors acted in such an uninformed manner as to constitute gross negligence. Plaintiffs allege that GM's outside directors acwrd with such haste and were so misled by management as to reach an uninformed decision in approving the Perot buy-out. In Grobow I, we carefully addressed plaintiffs' original allegations of the GM Board's lack of procedural due care. Grobow I, 539 A.2d at 190-191. We reviewed the role of the GM Special Review Committee, and we especially noted the absence of any allegations that the GM directors, and in particular its outside directors, were dominated or controlled by GM's management.... Id. at 191. In their restated complaint, plaintiffs delete reference to GM's Special Review Committee and the exclusive role played by GM's outside directors in reviewing the challenged transaction. Instead, plaintiffs now contend that a majority of GM's outside directors were uninformed because: (a) they were allegedly misled concerning the gravity of the disputes between senior management and Perot; and (b) the deposition testimony of two of GM's fourteen outside directors, Evans and Wyman (suggesting that they had misimpressions concerning the buy-out), is sufficient to defeat the presumption otherwise attached to an approval of a transaction by a board consisting of a majority of independent and disinterested directors. We decline to find the Court of Chancery to have abused its discretion in finding plaintiffs' newly pleaded allegations insufficient to avoid presuit demand. We have previously found wanting plaintiffs' allegations that GM's outside directors lacked independence because they were manipulated, misinformed or misled by management. Under the circumstances of this case, these findings with respect to director independence have equal application to the issue of director due care. In summary, we agree with the Court of Chancery that plaintiffs' restated complaint fails to plead particularized facts sufficient to raise a reasonable doubt that a majority of the GM Board acted in so uninformed a manner as to fail to exercise due care.