Hughes v. Xiaoming Hu - No. 2019-0112-JTL, 2020 Del. Ch. LEXIS 162 (Ch. Apr. 27, 2020)

Rule:

The operative question for demand futility is whether the Demand Board had a majority of disinterested and independent directors who could properly consider a demand to bring litigation. Demand is futile if there is a reasonable basis to doubt whether at least three of the six directors could exercise independent judgment when deciding whether to bring the litigation.

Facts:

Plaintiff shareholder instituted a shareholder derivative action against corporate officers and directors that allegedly failed to properly oversee the company's financial statements and related-party transactions in violation of Del. Code Ann. tit. 8, § 141. Defendants filed a motion to dismiss the complaint pursuant to Rule 23.1, contending that the plaintiff failed to make a demand on the board or plead that demand would have been futile. The defendants also moved to dismiss the complaint pursuant to Rule 12(b)(6), contending that the plaintiff failed to state a claim on which relief can be granted.

Issue:

Were the defendants entitled to dismiss the plaintiff’s complaint pursuant to Rule 23.1 or Rule 12(b)(6)? 

Answer:

No.

Conclusion:

The court held that defendants were not entitled to dismissal due to plaintiff's failure to make a demand pursuant to Del. Ch. Ct. R. 23.1 because demand would have been futile under the Rales analysis where several of the individual defendants were key corporate decision-makers and the board lacked a disinterested and independent majority that could have considered a demand. The court further held that the defendants were not entitled to dismissal for failure to state a claim under Del. Ch. Ct. R. 12(b)(6) because defendants failed to offer any independent arguments for dismissal and the analysis under Rule 23.1 was dispositive.