Delaware Courts and the Law Of Demand Excusal

Justin T. Kelton is an attorney specializing in complex commercial litigation at Dunnington, Bartholow & Miller, LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware courts have recently issued critical guidance regarding the contours of the demand excusal doctrine. The following cases outline the Delaware courts’ recent analyses on the issue.

Delaware Supreme Court Clarifies Analysis For Determining Director Independence

In Del. Cty. Emps. Ret. Fund v. Sanchez, Del. No. 702, 10/2/15, the Delaware Supreme Court clarified that, in considering whether a complaint has sufficiently pleaded a lack of independence, the Court of Chancery should not parse facts pled regarding personal relationships and those pled regarding business relationships as categorically distinct issues. Rather, the Court of Chancery must “consider in fully context” all of the “pled facts regarding a director’s relationship to the interested party.” Taking all of the facts together, the Delaware Supreme Court found that the plaintiff’s allegations that “a director has been close friends with an interested party for a half century” was sufficient to raise a pleading stage inference of interestedness because “close friendships of that duration are likely considered precious by many people, and are rare.”

Delaware Court of Chancery Finds Repeated Interrelated Business Dealings Sufficient To Establish Demand Excusal

In Caspian Select Credit Master Fund Limited v. Gohl, C.A. No. 10244-VCN, the Delaware Court of Chancery found that the plaintiffs had sufficiently alleged demand excusal based on the repeated interrelated business dealings of board members with the company’s controlling shareholders, who were counterparties to the challenged transaction. Specifically, plaintiffs alleged that three out of Key Plastics Corporation’s (“Key”) five directors could not be independent because they were beholden to Key’s largest shareholders, who together, owned 91.5% of Key’s stock. In support of this contention, the plaintiffs pleaded that the first director: (i) had been nominated to the board by the controlling shareholders; and (ii) was a principal in the controlling shareholders’ parent, and therefore, stood on both sides of the challenged transaction. With respect to the other two directors, plaintiffs pleaded that: (i) they were in the same business as the controlling shareholders, namely, restructuring distressed companies; (ii) they both had enjoyed advantageous business relationships with the controlling shareholders or their parent, and expected those relationships to continue; (iii) they had been appointed to numerous boards by the controlling shareholders; and (iv) with respect to one director, he was the CEO of a consulting firm which received substantial business from the controlling shareholders. The court found that, based on the substantial, repeated business dealings between the board members and the controlling shareholders, which the board members expected to continue in the future, plaintiffs had established that demand would be futile.

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