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Law School Case Brief

Aronson v. Lewis - 473 A.2d 805, 1984 Del. LEXIS 305

Rule:

To establish demand futility, a plaintiff need not allege that the challenged transaction could never be deemed a product of business judgment. Rather, a plaintiff must only allege facts which, if true, show that there is a reasonable inference that the business judgment rule is not applicable for purposes of considering a pre-suit demand pursuant to Del. Ch. Ct. R. 23.1.

Facts:

Beginning 1981, Meyers Parking System, Inc. (Meyers) entered into an employment agreement with Leo Fink, a director who owned 47% of the outstanding shares of the company. The terms of the agreement were alleged to be highly in favor of Fink. Meyers’ board also granted interest-free loans to Fink amounting to $225,000. Thereafter, the plaintiff, Harry Lewis, a stockholder of the company instituted an action, challenging the transactions entered into by Fink and Meyers. According to Lewis, the aforementioned transactions were approved only because Fink personally selected each director and officer of Meyers. Lewis further contended that the transactions violated the business judgment rule. The board of Meyers responded by moving to dismiss the claim in its entirety. The chancery court denied the motion and held that under Del. Ch. Ct. R. 23.1, Lewis successfully alleged demand futility in that he allowed the board of directors to correct the alleged wrong. Subsequently, the board of directors appealed.

Issue:

Did Harry Lewis successfully allege demand futility under Del. Ch. Ct. R. 23.1?

Answer:

No.

Conclusion:

The Court held that Lewis’ failure to allege facts implicating director bias, lack of independence, or involvement in activities contrary to corporate interest acted as a bar to meeting the requirement of demand futility.

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