The concept of demand futility, rooted in the fundamental elements of Delaware corporate law, has been present for decades. The demand futility rules developed, as most doctrines of Delaware corporate law do, through judicial decisions over the years. While one can argue about if there is any fundamental difference between the Aronson and Rales tests and whether the standards should be unified, one thing that almost everyone agreed on was that the court tested demand futility as of the date the complaint was filed. Changes in board composition after the filing of the complaint usually did not affect the demand futility analysis, unless the plaintiff amended the complaint after a change in board composition to assert a claim not already validly in litigation, or the complaint was dismissed and then refiled. This rule itself was subject to equitable modification, so, for instance, if the board changes after the filing of the complaint and the plaintiff wants to amend its complaint, she need not plead demand futility as to the board on the date of the amendment for claims already “validly in litigation,” e.g., Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006). On the other hand, if the complaint gets dismissed and then refiled, the board on the date of the refiling is the proper board to determine demand futility. In Park Employees’ and Retirement Board Employees Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (Del. Ch. May 31, 2016), the Delaware Court of Chancery addressed a new twist on the change in board composition argument: What happens if the board changes as a result of a properly noticed stockholder meeting shortly after the filing of the complaint? On the unique facts of this case, the Court of Chancery held that it would determine demand futility based on the board elected shortly after the plaintiff filed the complaint.
The facts of Park Employees tell a familiar tale of investigation of alleged Medicare and Medicaid fraud, alleged failure to disclose deterioration of a line of business and alleged insider trading at BioScrip Inc. These events prompted several securities law-based actions to be filed in the U.S. District Court for the Southern District of New York. Certain stockholders also made a demand under Delaware law to inspect the BioScrip books and records to investigate the same issues. The company produced some records in response to the demand.
