Opinion ID: 1955244
Heading Depth: 1
Heading Rank: 6

Heading: Standard Of Review Demand Refused/Motion To Dismiss

Text: Whenever any action or inaction by a board of directors is subject to review according to the traditional business judgment rule, the issues before the Court are independence, the reasonableness of its investigation and good faith. By electing to make a demand, a shareholder plaintiff 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. Absent an abuse of discretion, if the requirements of the traditional business judgment rule are met, the board of directors' decision not to pursue the derivative claim will be respected by the courts. Aronson v. Lewis, 473 A.2d at 812; Zapata Corp. v. Maldonado, 430 A.2d at 784-85. In such cases, a board of directors' motion to dismiss an action filed by a shareholder, whose demand has been rejected, must be granted. [20] If Courts would not respect the directors' decision not to file suit, then demand would be an empty formality. Starrels v. First Nat. Bank of Chicago, 870 F.2d 1168, 1174 (7th Cir.1989) (Easterbrook, J., concurring). The same standard of judicial review is applicable when a board delegates authority to respond to a demand to a special litigation committee. The issues are solely the good faith and the reasonableness of the committee's investigation. Zapata Corp. v. Maldonado, 430 A.2d at 787. The ultimate conclusion of the [special litigation] committee ... is not subject to judicial review. Id. (emphasis added). Judicial review of the merits of a special litigation committee's decision to refuse a demand is limited to those cases where demand upon the board of directors is excused and the board has decided to regain control of litigation through the use of an independent special litigation committee. Aronson v. Lewis, 473 A.2d at 813-14; Zapata Corp. v. Maldonado, 430 A.2d at 787. Cf. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 327 (1987). The Court of Chancery specifically recognized this important distinction. In this case, the Court of Chancery found there was no material dispute that the Board, through its Committee, had function[ed] effectively ... in a way that fully satisfies the prerequisites for the application of the business judgment rule. [21] Consequently, the Court of Chancery concluded that, in accordance with the business judgment expressed by the Board, through its Committee, Spiegel's derivative action had to be dismissed. Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988); Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984). We agree.