The recent decision by Vice Chancellor Sam Glasscock III of the Delaware Chancery Court in Park Employees’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (May 31, 2016) addressed a matter of first impression. Specifically, when a stockholder derivative complaint is filed as the composition of a corporation’s board of directors is about to change, which board will the court consider in determining whether a plaintiff adequately pleaded demand futility? While the general rule is that demand futility should be assessed as of the date the complaint is filed, Glasscock held that, under the unique circumstances where a complaint was filed after a new board was announced and only served on the corporation after the new board took control, the new board of directors was the proper board to evaluate demand futility under Delaware Court of Chancery Rule 23.1.
It is well established that a derivative claim belongs not to stockholders as individuals, but to the corporation itself. That principle applies no less to the decision to pursue or maintain litigation than to the management of other corporate affairs, as it is the board of directors that is empowered to act for the corporation. See 8 Del. C. Section 141(a) (“The business and affairs of every corporation … shall be managed by or under the direction of a board of directors.”). Derivative litigation is the exception to this rule. It is an equitable remedy that is to be used sparingly, and only where the stockholder has shown that the board is incapable of acting in the best interests of the corporation.
