The recent decision of Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (May 31, 2016) presents an interesting question: when a plaintiff files a derivative complaint knowing that the composition of the board is about to change, will the Court consider the independence of the old board or the new board in determining whether plaintiff adequately pled demand futility?

In Park Employees, plaintiff’s complaint alleges, among other things, claims for breach of fiduciary duties of loyalty and care by failing to oversee operations and compliance with various federal and state laws, alleged securities law disclosure violations, and insider trading.

Plaintiff did not submit a demand upon the board, which at the time consisted of 3 non-defendant directors, and seven defendant directors, but instead plead demand futility.  However, weeks before the complaint was filed, the company announced in its proxy that it would be holding uncontested elections just days after plaintiff’s complaint was filed.  The complaint was served three weeks after the new board was installed.

In a matter of first impression, Vice Chancellor Glasscock found that the May 2011 board was the proper board for purposes of evaluating demand futility under Rule 23.1. While the general rule, as noted by the Court, is that demand should be assessed as of the date a complaint is filed, the Vice Chancellor found that, “under the unique facts presented by this case, a departure from the general rule is both equitable and in keeping with the policy behind Rule 23.1.”  In dismissing the complaint, Vice Chancellor Glasscock allowed plaintiff leave to amend the complaint to plead demand futility against the new board of directors.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.