Opinion ID: 3014744
Heading Depth: 2
Heading Rank: 2

Heading: Would demand on Medco’s board be futile?

Text: Medco is a Delaware corporation, so we apply Delaware law to determine whether demand on its board was properly excused. See Blasband, 971 F.2d at 1047. This is a double derivative suit because Medco was Merck’s subsidiary at the time the actions leading to the qui tam claims arose. Under Delaware law, a plaintiff must satisfy the test for demand futility for the subsidiary’s board as well as for the parent’s board. Rales, 634 A.2d at 934. The District Court held that plaintiffs did not meet their burden of demonstrating demand futility, as their complaint failed to allege anything more than that Medco’s directors were executives at the time of the alleged wrongdoing. The Court thus dismissed plaintiffs’ claims against Medco. 10 Delaware law provides that demand on a board may be excused if, inter alia, a plaintiff creates a reasonable doubt that a majority of the directors are disinterested and independent. Aronson, 473 A.2d at 814–15. But the “mere threat of personal liability” for a director’s actions is by itself insufficient to show that the director is not independent or disinterested. Id. at 815. This is similarly true for mere allegations that the directors “approved, participated, or acquiesced in a challenged transaction.” Grobow v. Perot, 526 A.2d 914, 924 (Del. Ch. 1987), aff’d, 539 A.2d 180 (Del. 1988). Plaintiffs allege that demand on Medco’s board would be futile because three of the four Medco directors also were its executives at the time of the alleged wrongdoings. The fact that a director is also an officer, without more, is insufficient to establish the director’s interest or lack of independence. Cf. 2 David A. Drexler et al., Delaware Corporation Law and Practice § 42.03[2][a], at 42-20 (2004). Plaintiffs also argue that a majority of Medco’s directors were neither independent nor disinterested because three of Medco’s inside directors are exposed to liability through various claims against the company. A plaintiff can demonstrate interest by showing that “a corporate decision [could] have a materially detrimental impact on a director, but not on the corporation and the stockholders.” Rales, 634 A.2d at 936. For example, in Rales the Court concluded that, because another court had determined that demand futility had been established for the board, there was a “‘substantial likelihood’” of the directors’ liability, and that established their interest. Id. Plaintiffs argue that Medco may be subject to future 11 litigation arising from its past wrongful business conduct and that this future litigation could result in personal liability, and thus interest in the outcome, for the directors. But this future litigation is different from the current suit. In Aronson, as in Rales, the directors’ personal liability stemmed from the transaction challenged in the derivative suit. Cf. id.; Aronson, 473 A.2d at 815. Potential liability from other, unrelated litigation would not make Medco’s directors interested in the decision to consider a demand for this specific derivative suit. For example, if Medco’s directors were faced with damages from an ERISA suit, and if plaintiffs made demand on the Medco board for an unrelated claim, it is unlikely that the specter of the ERISA damages would so worry the directors as to cause them to reject plaintiffs’ demand. Were that to be the standard for directors’ interest, any possible future litigation could serve to create demand futility. Judgment counsels against such an open-ended course and its unintended consequences; thus we affirm the District Court’s opinion as to demand futility on Medco’s board. Cf. Decker v. Clausen, Civ. A. Nos. 10,684 & 10,685, 1989 WL 133617, at  (Del. Ch. Nov. 6, 1999).