In the case of Harold Grill 2 IRA v. Louis R. Chênevert, et al., Civil Action No. 7999-CS (June 24, 2013), the Court of Chancery ruled upon a motion to dismiss a derivative action on behalf of United Technologies Corporation (“UTC”), a technology conglomerate.  Harold Grill 2 IRA, the plaintiff, alleged that the UTC board of directors consciously caused UTC to misrepresent violations of export controls by two of its subsidiaries to the federal government in 2006. As a result of these misrepresentations, UTC was charged with violating federal law and paid a $55 million fine.

The defendants in this suit are the thirteen-member UTC board at the time of the complaint, together with the former Chairman and CEO of UTC, George David.  The plaintiffs have not alleged that any of these individuals, other than David and the firstnamed defendant, Louis Chênevert, the current Chairman and CEO, are not independent. 

The Court found that plaintiff did not make a demand on the board to prosecute this action, and the defendants moved to dismiss the complaint on the ground that the plaintiff has not pled facts that support an inference that a majority of the board faces a “substantial likelihood of personal liability.”

The Court found that plaintiff alleged only that David was aware of the false disclosures at the time they were made. The Court further found that David left the board in 2009, and the plaintiff did not plead facts alleging that that any of the thirteen directors who constituted UTC’s board at the time of the complaint, twelve of whom are independent, were aware of the false disclosures or have otherwise breached their duty of loyalty. Therefore, the Court dismissed the complaint with prejudice as to the named plaintiff.

This decision demonstrates that a plaintiff who wishes to proceed with a derivative suit without making a demand must plead with particularity that a majority of the board faces a substantial risk of liability.