Opinion ID: 2633558
Heading Depth: 1
Heading Rank: 8

Heading: Demand futility

Text: In Johnson v. Steel, Incorporated, a 1984 case, this court stated that [w]here the board participated in the wrongful act or is controlled by the principal wrongdoer, it is generally held that no demand is needed. [29] For instance, there is no point in requiring a party to make a demand for corrective action to officers and directors who are swayed by outside interests, which contaminates their ability to conduct the corporation's affairs. [30] However, the directive previously articulated in Johnson is insufficient. The Johnson directive, broadly interpreted, suggests that the demand prerequisite could be excused with a mere allegation of participation. Such a broad reading could subject the board to immediate litigation, and thereby eviscerate the purpose behind the demand requirement and the business judgment rule. [31] We agree with the Delaware Supreme Court's observation in Aronson v. Lewis that [b]earing in mind the presumptions with which director action is cloaked,. . . the matter must be approached in a more balanced way. [32] Accordingly, to the extent that Johnson suggests that the demand requirement is excused as to the board of directors merely because the shareholder derivative complaint alleges that a majority of the directors participated in wrongful acts, without regard to their impartiality or to the protections of the business judgment rule, it is overruled. The business judgment rule, however, pertains only to directors whose conduct falls within its protections. [33] Thus, it applies only in the context of valid interested director action, [34] or the valid exercise of business judgment by disinterested directors in light of their fiduciary duties. [35] But the subject of shareholder derivative complaints is not necessarily always a business decision by the directors, and the directors to whom a demand must be made are not always the same directors as those against whom the allegations are made. Thus, it is not enough to say that the court must always look to the business judgment rule in deciding whether demand futility has been sufficiently pleaded. Facing this same quandary, the Delaware Supreme Court has developed, in a series of decisions, two associated analyses to be conducted depending on whether the board that would consider a demand is (1) potentially protected by the business judgment rule when its direct action is in question, or (2) can be disinterested and independent in its evaluation of the demand for corrective action.