Law School Case Brief
Beam v. Stewart - 845 A.2d 1040 (Del. 2004)
In a derivative action involving presuit demand and the independence of individual members of a board of directors, the directors are entitled to a presumption that they have been faithful to their fiduciary duties. In the context of presuit demand, the burden is upon the plaintiff in a derivative action to overcome that presumption. The court must determine whether the plaintiff has alleged particularized facts creating a reasonable doubt of a director's independence to rebut the presumption at the pleading stage. If the court determines that the pleaded facts create a reasonable doubt that a majority of the board could have acted independently in responding to the demand, the presumption is rebutted for pleading purposes and demand will be excused as futile
Plaintiff shareholder derivatively sued defendants, a corporation, its majority shareholder, and five other members of the board of directors, for injury to the corporation. The Delaware Court of Chancery dismissed the suit under Del. Ch. Ct. R. 23.1 because the shareholder failed to plead particularized facts demonstrating presuit demand futility. The shareholder appealed. The majority shareholder's name was closely tied to the corporation. The majority shareholder was a director and officer. The shareholder alleged breaches of fiduciary duties of care and loyalty in (1) the majority shareholder's untimely sale of stock in another entity, and (2) the way the board of directors handled the post-sale media attention. The sale and media coverage allegedly affected both the majority shareholder's and the corporation's reputation and financial future. The shareholder did not make a demand for the board to pursue the claims on behalf of the corporation.
Did the trial court err when it dismissed the claim in a derivative suit because the plaintiff failed to make presuit demand on the corporation's board of directors and failed to demonstrate demand futility?
The state supreme court agreed with the trial court that the shareholder adequately pled particularized facts to provide the required reasonable doubt that the majority shareholder and one other director were not disinterested or independent. However, because the shareholder did not plead facts sufficient to support a reasonable inference that at least one other director was incapable of considering demand, the shareholder was required to make demand on the board before pursuing a derivative suit. Hence, presuit demand was not excused, and the trial court did not err by dismissing the case.
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