Opinion ID: 1996638
Heading Depth: 1
Heading Rank: 14

Heading: The Derivative Shareholder's Pleading Burden in a Demand Refused Case

Text: We next address the question of whether the trial court applied the proper pleading standard in determining the sufficiency of the Levine complaint to withstand dismissal under Rule 23.1. At issue is the form of pleading and degree of particularity required for a complaint based on wrongful refusal of demand to be sustained. Levine makes two alternative arguments. First, he contends that, assuming the pleading standards controlling a claim of wrongful refusal of demand are those set forth in Aronson and Grobow I, the Court of Chancery committed legal error by applying to his complaint a pleading standard that was heightened and far more stringent than that required by Rule 23.1, as interpreted in Aronson and Grobow. In the alternative, Levine argues that a more lenient pleading standard should be applied under Rule 23.1 to sustain a claim of wrongful refusal of demand which alleges legally sufficient reasons for questioning the validity of a board's exercise of its business judgment. [6] See In re General Motors Class E Stock Buyout, 694 F.Supp. at 1119; Allison, 604 F.Supp. at 1121. In Aronson, this Court formulated the reasonable doubt pleading standard for determining the sufficiency of a complaint based on demand excused to withstand a Rule 23.1 motion. This Court stated: In our view demand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule.       In sum the entire review is factual in nature. The Court of Chancery in the exercise of its sound discretion must be satisfied that a plaintiff has alleged facts with particularity which, taken as true, support a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. Only in that context is demand excused. Aronson, 473 A.2d at 808, 815. Grobow I, 539 A.2d at 186. Levine does not dispute the applicability of the Aronson reasonable doubt test to a claim of wrongful refusal of demand. The reasons underlying the adoption in Aronson of the reasonable doubt test to a claim of demand futility have equal application to standing of a derivative plaintiff to maintain a claim of wrongful refusal of demand. See Spiegel v. Buntrock, 571 A.2d at 773-775. We think it clear from the record and the decision below that the court applied the reasonable doubt pleading standard to Levine's claim of wrongful refusal of demand. In addressing the issue of the appropriate pleading standard, the court stated, The Rule 23.1 demand requirement, and the implementing form of judicial scrutiny required by Aronson v. Lewis and Grobow v. Perot, supra , are procedures to which this court must adhere in determining whether the board is so disabled. In properly rejecting plaintiff's contention that the court should apply the more lenient Rule 12(b)(6) notice pleading standard, the court reasoned that a notice form of pleading would contravene the policy underlying Rule 23.1 and the clear mandate of Aronson.  It is patently clear that the court considered the reasonable doubt standard of Aronson as controlling its ultimate determination of the sufficiency of Levine's complaint under Rule 23.1. Alternatively, Levine argues that a derivative complaint based on a claim of demand refused should be found to comply with Rule 23.1 when a plaintiff alleges legally sufficient reasons to call into question the validity of the Board of Directors' exercise of business judgment. Allison, 604 F.Supp. at 1121. Levine overlooks the holding in Allison dismissing the complaint for its failure to meet the requirements of Federal Rule of Civil Procedure 23.1 of pleading facts with particularity. Id. at 1122. (Plaintiff's paragraphs 6a and 6b of the amended complaint contain nothing more than bare conclusory allegations that the GM Board acted wrongfully in adopting the recommendation of the committee and rejecting the demand.). The court in Allison recognized that Rule 23.1 was a marked departure from the `notice' pleading philosophy of the Federal Rules of Civil Procedure, id. at 1112, for the reasons previously stated in III-B, supra. Rule 23.1's command that a derivative complaint allege with particularity the efforts... made by the plaintiff to obtain the action he desires from the directors ... and the reasons for his failure to obtain the action ... cannot be parsed to permit conclusory reasons alone to suffice. The requirements of particularity apply both to plaintiff's efforts to obtain the desired action and the reasons for failing to secure redress. Allison cannot be fairly read as intending any departure from Aronson 's and Grobow I 's requirement of well-pleaded allegations of fact which create a reasonable doubt that a board of directors' decision is protected by the business judgment rule. Grobow I, 539 A.2d at 186, 187 (well-pleaded allegations of fact must be accepted as true; conclusory allegations of fact or law not supported by allegations of specific fact may not be taken as true); Aronson, 473 A.2d at 815. We also find misplaced Levine's reliance upon In re General Motors Class E Stock Buyout, 694 F.Supp. at 1119, for a lesser pleading standard. We refer to the federal court's application of Delaware law to other GM derivative plaintiff suits challenging the Perot repurchase transaction and the GM Board's refusal of their demand for rescission. While the court recognized that allowing general allegation[s] by a plaintiff would undermine the purposes of Rule 23.1 and that the burden of rebutting the presumption of the business judgment rule was upon plaintiffs, the court found plaintiffs to have met that burden with respect to the Board's decision to refuse their demand. Id. at 1133-34. The court found sufficiently particularized the complaint's conclusory allegations that the GM Board neither reviewed its initial decision to approve the transaction nor made any inquiry in response to the demand letter. As alleged, the Board took no steps to obtain information prior to refusing the demand. Id. at 1134. These rulings appear to be premised on a serious misunderstanding of the controlling Delaware law. The In re General Motors Class E Stock Buyout court has erroneously stated that the reasonable doubt standard does not apply to a claim of demand refused. Id. at 1132. The court also appears to have applied Allison 's erroneous dicta that a complaint which alleges legally sufficient reasons or conclusory allegations regarding refusal of demand is sufficient to rebut the business judgment presumption accorded a refusal of a demand. See In re General Motors Class E Stock Buyout, 694 F.Supp. at 1132. In our view, the In re General Motors Class E Stock Buyout court's Rule 23.1 ruling is flawed by its assumption that a claim of wrongful refusal of demand is reviewed under a more lenient pleading standard than a claim based on futility of demand. Finally, we must also reject defendant's contention that Spiegel v. Buntrock, 571 A.2d at 767, may be interpreted as implicitly permitting a pleading standard more stringent than reasonable doubt to be applied under Rule 23.1 to a derivative claim alleging wrongful refusal of a demand. Defendants assert that since the business judgment rule presumption attaches to the Board's refusal to rescind the challenged transaction, plaintiff Levine's complaint, to withstand dismissal under Rule 23.1, should be required to allege particularized facts sufficient to rebut the business judgment rule's attachment to the board's refusal of demand. Defendants misread Spiegel. Spiegel represents no departure from Aronson in the adoption and application of the reasonable doubt standard for determining the sufficiency of a complaint alleging wrongful refusal of demand to withstand dismissal under Rule 23.1. Spiegel, 571 A.2d at 773-776.