Collins J. Seitz, Jr. is a Justice of the Delaware Supreme Court; and S. Michael Sirkin is a Partner at Ross Aronstam & Moritz LLP. This post is based on their recent article, published in The Business Lawyer, and is part of the Delaware law series; links to other posts in the series are available here.
In Delaware, stockholder derivative litigation follows a familiar path. The plaintiff files a complaint, alleging that demand is futile. The defendants move to dismiss under Court of Chancery Rule 23.1, arguing that the plaintiff failed to make a demand on the board of directors to bring the suit on behalf of the corporation. The motion is usually coupled with a motion to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim. If the Court of Chancery grants the motion to dismiss on either ground, the matter ends.
What happens, though, if instead of pleading demand futility, the plaintiff actually makes a litigation demand? This path appears to be traveled less frequently, and appears to be less well understood by practitioners and directors. By making a demand on the board, the would-be plaintiff concedes that demand is not futile and that a majority of the board is capable of impartially considering the demand. As a result, an aggrieved stockholder who believes that the corporation is sitting on a valuable claim faces a stark choice between making a demand and attempting to plead demand futility.
