Demand Futility in Derivative Actions

A. First determine if you must make a demand:

Delaware Test (Aronson v. Lewis): New York Test (Marx v. Akers): MBCA § 7.42 Universal Demand:
Whether under the particularized facts A demand would be futile if a complaint A demand that the BoD initiate suit is
alleged in the complain, a reasonable alleges with particularity that: always required. A SH can initiate suit at
doubt* is created that: 1. A majority of the directors are the earlier of:
1. The directors are disinterested and interested in the transaction (duty 1. Rejection of the demand by the BoD
independent OR of loyalty), or 2. 90 days after demand is made and
2. The challenged transaction was 2. The directors failed to inform no response from BoD
otherwise the product of a valid themselves to a degree necessary 3. OR – Can bring suit < 90 days after
exercise of business judgment about the transaction (duty of care), the demand is made, and without
or BoD rejection, IF the corp. would
-Factual based, case-by-case basis
suffer irreparable injury as a result
- reasonable doubt really means that the SH 3. The directors failed to exercise their
must create reasonable grounds to believe business judgment in approving the
1 or 2. (SAME AS NEW YORK) transaction (good faith).

(The rest that follows is from

Delaware case law, but Velasco says that other jurisdictions follow similar procedures except DE’s biz
judgment rule)

B. If your demand was NOT excused, you must make the demand to the BoD.
a. If your demand was made and refused, the BoD’s decision no to engage in suit will be respected by the
court unless it was wrongful. (Zapata Corp. Maldonado)
i. The board’s decision to reject the demand falls under the business judgment rule (BJR).
b. A demand when required and refused (if not wrongful), terminates a SH’s legal ability to initiate a
derivative action.

C. If your demand would be “futile” under whichever test above, you are excused from making demand of the
BoD.
a. The SH can initiate the litigation on the corporation’s behalf.
b. HOWEVER, even if excused corporation can still rid itself of detrimental litigation under DE § 141(a)
by following certain procedures:

Special Litigation Committee

• BoD creates a committee to investigate the SH’s allegations of a derivative action.
• The committee consists of
o Independent directors, and is
o delegated final power in determining whether to terminate the suit.

IF the Special Litigation Committee decides that (and they always do) the suit should be terminated, their
motion to dismiss the suit will be judged by DE Courts (Zapata):
1. Courts will inquire into the good faith and independence of the committee and its bases
supporting its conclusion. (If the court is determines that the committee is not independent, has
not shown reasonable bases for its conclusions, or otherwise not satisfied THEN Step 2 
2. The court will then determine whether the motion should be granted by applying its own
independent business judgment.
a. The DE court is recognizing the concept of structural bias common to Corp. BoD when
they offer further review of the Independent Special Committees Motion to Dismiss.
*I THINK THIS IS RIGHT!!!!!!!
b. Corporations will also create these independent special litigation committees in order
 Demand Futility in Derivative Actions
to properly reject a required demand, when demand is not excused.