Opinion ID: 2826720
Heading Depth: 3
Heading Rank: 1

Heading: Derivative Lawsuits

Text: “The derivative form of action permits an individual shareholder to bring ‘suit to enforce a corporate cause of action against officers, directors, and third parties.’” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (quoting Ross v. Bernhard, 396 U.S. 531, 534 (1970)) (emphasis omitted). “Devised as a suit in equity, the purpose of the derivative action [is] to place in the hands of the individual shareholder a means to protect the interests of the corporation from 10 the misfeasance and malfeasance of ‘faithless directors and managers.’” Id. (quoting Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)). “[A] shareholder 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.” Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 138 (2d Cir. 2004) (internal quotation marks omitted). If the board refuses the shareholder’s demand, the derivative suit may proceed only if the shareholder shows that the board’s refusal was “wrongful.” Abramowitz v. Posner, 672 F.2d 1025, 1030 (2d Cir. 1982). Accordingly, Rule 23.1 of the Federal Rules of Civil Procedure requires a complaint in a derivative action to “state with particularity . . . any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and . . . the reasons for not obtaining the action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3). Although Rule 23.1 sets forth the pleading standard for federal court, the substance of the demand requirement is a function of state law—here, Delaware law. See RCM Sec. Fund, Inc. v. Stanton, 928 F.2d 1318, 1326 (2d Cir. 1991). 11 Under Delaware law, these allegations of wrongful refusal are reviewed under the business‐judgment rule, which creates “a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). Importantly, “[t]he ultimate conclusion of the [board] . . . is not subject to judicial review.” Spiegel v. Buntrock, 571 A.2d 767, 778 (Del. 1990) (ellipsis in original) (quoting Zapata Corp. v. Maldonado, 430 A.2d 779, 787 (Del. 1981)). Instead, when evaluating wrongful refusal, “[t]he issues are solely the good faith and the reasonableness of the committee’s investigation.” Id. “[F]ew, if any, plaintiffs surmount [the] obstacle” of rebutting the presumption created by the business‐judgment rule and showing that a demand was wrongfully refused. RCM Sec. Fund, Inc., 928 F.2d at 1328.