Opinion ID: 1955244
Heading Depth: 1
Heading Rank: 2

Heading: Derivative Action/Demand Requirement

Text: A basic principle of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation. Paramount v. Time, Del. Supr., 571 A.2d 735, 738, 751 (1990); Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261, 1280 (1989); Kaplan v. Peat, Marwick, Mitchell & Co., Del. Supr., 540 A.2d 726, 729 (1988); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811-12 (1984). The exercise of this managerial power is tempered by fundamental fiduciary obligations owed by the directors to the corporation and its shareholders. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 729. The decision to bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation. Zapata Corp. v. Maldonado, 430 A.2d at 782. Consequently, such decisions are part of the responsibility of the board of directors. 8 Del.C. § 141(a). [11] Nevertheless, a shareholder may file a derivative action to redress an alleged harm to the corporation. The nature of the derivative action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it. Aronson v. Lewis, 473 A.2d at 811. In essence, it is a challenge to a board of directors' managerial power. Pogostin v. Rice, 480 A.2d at 624. Thus, by its very nature, the derivative action impinges on the managerial freedom of directors. Id. In fact, the United States Supreme Court has noted that the shareholder derivative action could, if unrestrained, undermine the basic principle of corporate governance that the decisions of a corporation  including the decision to initiate litigation  should be made by the board of directors or the majority of shareholders. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 531, 104 S.Ct. 831, 836, 78 L.Ed.2d 645 (1984) (citing Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1882)). See Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730. Because the shareholders' ability to institute an action on behalf of the corporation inherently impinges upon the directors' power to manage the affairs of the corporation the law imposes certain prerequisites on a stockholder's right to sue derivatively. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730 (citing Pogostin v. Rice, 480 A.2d at 624); Aronson v. Lewis, 473 A.2d at 811. Chancery Court Rule 23.1 requires that shareholders seeking to assert a claim on behalf of the corporation must first exhaust intracorporate remedies by making a demand on the directors to obtain the action desired, or to plead with particularity why demand is excused. Ch. Ct.R. 23.1; Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730. See also Aronson v. Lewis, 473 A.2d at 811-812; Zapata Corp. v. Maldonado, 430 A.2d at 783. [12] The purpose of pre-suit demand is to assure that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation, to decide whether to invest the resources of the corporation in litigation, and to control any litigation which does occur. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730. [13] [B]y promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations. Aronson v. Lewis, 473 A.2d at 812.