Under Delaware law, if a shareholder requests that a company pursue litigation, the decision whether to pursue litigation on behalf of the company generally resides with the board as an exercise of its business judgment.  A stockholder lacks standing to bring suit on the company’s behalf unless the stockholder (i) has demanded that the directors pursue the corporate claim and the demand is wrongfully refused; or (ii) purports to initiate litigation on behalf of the company and alleges with particularity why pre-suit demand is excused as futile.

Under the Rales test, where a putative derivative plaintiff alleges demand futility, in order to avoid dismissal, the shareholder must point to particularized allegations in its complaint raising reasonable doubt that a majority of the board could impartially consider a demand to sue.  Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).

In the recent decision of Lenois v. Lawal, et al., C.A. No. 11963-VCMR (Del. Ch. Nov. 7, 2017), the Delaware Court of Chancery examined whether plaintiff stockholder adequately alleged demand futility.  This opinion demonstrates that merely because one officer or director may have acted in bad faith, does not excuse demand if the plaintiff is unable to plead particularized facts demonstrating that a majority of the board could not act impartially upon a stockholder demand.

In addition, this opinion illustrates that where a company’s charter contains an exculpatory provision under Section 102(b)(7) of the Delaware General Corporation Law, a plaintiff must plead facts showing that a majority of the board faces a risk of liability for claims that would not be exculpated, for example, claims for not acting in good faith or for violation of the duty of loyalty.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.