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To plead demand futility under the second prong of the test for showing demand futility regarding a corporate board, a shareholder must allege particularized facts that create a reasonable doubt that a challenged transaction was the product of a valid exercise of business judgment. This invites an inquiry into the substantive nature of the challenged transaction and a board's approval thereof. One potential way to show that a board was not exercising valid business judgment is to show that there was a sustained or systematic failure of the board to exercise oversight--a violation of the board's duty of loyalty by way of bad faith.
Plaintiffs, who are shareholders of CNET, initiated this action under 8 Del. C. § 220 to seek books and records relating to stock options backdating--a practice in which the company has already admitted it engaged--after being ordered to do so by a federal judge in California. This seeming simplicity notwithstanding, CNET opposed the demand for inspection, the parties battled over discovery via a contentious motion to compel, and only on the brink of trial did CNET agree to share certain documents with plaintiffs. This agreement was not, however, all encompassing, and now the parties dispute the scope of books and records to which plaintiffs are entitled. The district judge in California issued a stay pending a books and records demand in Delaware.
Were the shareholders entitled to documents relating to options granted before they owned stock in CNET?
The court found that, because the shareholders' purpose in the action was to obtain the particularized facts they needed to adequately allege demand futility (rather than to investigate potential claims that they had no standing to assert), the shareholders were to have access to certain documents pertaining to options granted before they owned shares in the corporation. Thus, the shareholders were to have access to books and records that predated their purchase of stock to allow them to explore a potential lapse in the good faith of the corporate board that was to excuse demand in the California derivative suit. The outer bounds of this disclosure were defined by the shareholders' demand letter itself; not by the shareholders' interrogatories.