The power to bring a claim for breach of duty causing injury to a Delaware corporation resides with the board of directors. It is part of their duty under Section 141(a) of the Delaware General Corporation Law to manage the business and affairs of the corporation. A stockholder wishing to proceed with such a claim therefore must first make demand on the board of directors or plead demand futility under Court of Chancery Rule 23.1. As demonstrated by Harrison Metal Capital III v. Mathe, C. A. No. 2022-0261-PAF (Del. Ch. March 27, 2024), failure to assert well-pleaded allegations showing that a majority of the board is disabled from disinterestedly and independently evaluating whether to bring an action is fatal to a stockholder derivative claim. As the court emphasized, notice pleading does not suffice to demonstrate demand futility; rather, a plaintiff must plead particularized facts to show demand futility, which the court found the Harrison plaintiff failed to do.

Background

The plaintiff, a longtime and substantial stockholder owning a 36% equity interest, was entitled to designate one director on the company’s five-person board. That stockholder’s director sought books and records and thereafter the plaintiff brought this action against the company’s chief executive officer and chief technology officer, who also were members of the board. The complaint at issue challenges misconduct in connection with unilateral increases in CEO compensation, accounting irregularities, and financial disclosures regarding loans and down round financing. The five-person board in place at the time of the amended complaint when the plaintiff first asserted derivative claims consisted of one disinterested and two interested directors. The court dismissed the action because the plaintiff failed to allege particularized facts sufficient to show that the two other directors could not impartially evaluate the allegations of the complaint.

  • Court Finds Plaintiff Failed to Allege Particularized Facts Showing a Majority of the Directors Was Disabled From Considering a Demand