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In a derivative suit, a stockholder seeks to displace the board's authority over a litigation asset and assert the corporation's claim. Unless the board of directors permits the stockholder to proceed, a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regarding the litigation.
At defendant Mark Zuckerberg’s request, the Facebook board of directors (the "Board") pursued a reclassification of Facebook's shares. The transaction involved authorizing a new class of non-voting stock, then issuing two shares of non-voting stock to each existing stockholder. The effect of the reclassification would be to shift two-thirds of Facebook's economic value into the non-voting stock. The chief beneficiary was Zuckerberg, who would be able to transfer the bulk of his economic ownership in Facebook without giving up voting control. Various stockholder plaintiffs filed lawsuits and sought a permanent injunction blocking the reclassification. Facebook agreed not to implement the reclassification until after a ruling on its merits. Just before trial, at Zuckerberg's request, the Board withdrew the reclassification. The Board’s decision rendered the litigation moot. Subsequently, the present plaintiff filed a derivative action against defendant Zuckerberg and certain members of the Board who approved the reclassification. The plaintiff maintained that the pursuit of the reclassification constituted a breach of duty and that Facebook was harmed as a result. The defendants moved to dismiss the derivative action under Rule 23.1 on the grounds that the plaintiff failed to demand that the Board pursue the litigation and did not establish that demand was futile.
Should the plaintiff’s failure to demand that the Board pursue the litigation warrant the dismissal of the action?
The court granted the defendants’ motion to dismiss under Del. Ch. Ct. R. 23.1 because no pre-suit demand was made and the complaint failed to plead facts suggesting that a majority of the directors acted in bad faith or otherwise were not exculpated under Del. Code Ann. tit. 8, § 102(b)(7) and could not exercise disinterested and independent judgment regarding a demand. Because the analytical framework of the test laid down in Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) was poorly suited to evaluating a board that did not have a new majority of directors and that had some conflicted directors who were incapable of considering a demand, the court applied the test laid down in Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993, as the general demand futility test on a director-by-director basis, finding no reasonable basis to conclude that a majority could be held liable or were not independent.