To plead demand excusal under Del. Ch. Ct. R. 23.1, a plaintiff in a derivative action must plead particularized facts creating a "reasonable doubt" that either: (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Although there is a heightened burden to plead particularized facts, when a motion to dismiss for failure to make a demand is made, all reasonable inferences from the pleaded facts must nonetheless be drawn in favor of the plaintiff in determining whether the plaintiff has met its burden under Aronson.
This is an appeal from a complicated transaction between a private company whose equity is wholly owned by the family of A.R. Sanchez, Jr., Sanchez Resources, LLC (hereinafter, the "Private Sanchez Company"), and a public company in which the Sanchez family constitutes the largest stockholder bloc with some 16% of the shares and that is dependent on the Private Sanchez Company for all of its management services, Sanchez Energy Corporation (the "Sanchez Public Company"). The transaction at issue required the Sanchez Public Company to pay $78 million to: i) help the Private Sanchez Company buy out the interests of a private equity investor; ii) acquire an interest in certain properties with energy-producing potential from the Private Sanchez Company; iii) facilitate the joint production of 80,000 acres of property between the Sanchez Private and Public Companies; and iv) fund a cash payment of $14.4 million to the Private Sanchez Company. In this derivative action, the plaintiffs alleged that this transaction involved a gross overpayment by the Sanchez Public Company, which unfairly benefited the Private Sanchez Company by allowing it to use the Sanchez Public Company's funds to buy out their private equity partner, obtain a large cash payment for itself, and obtain a contractual right to a lucrative royalty stream that was unduly favorable to the Private Sanchez Company and thus unfairly onerous to the Sanchez Public Company. As to the latter, the plaintiffs alleged that the royalty payment was not only unfair, but was undisclosed to the Sanchez Public Company stockholders, and that it was the Sanchez family's desire to conceal the royalty obligation that led to what can be fairly described as a convoluted transaction structure. The Court of Chancery dismissed the complaint, finding that the defendants were correct in their contention that the plaintiffs had not pled demand excusal under Aronson v. Lewis 473 A.2d 805 (Del.1984).
Did the Court of Chancery err in dismissing the complaint, finding that the defendants were correct in their contention that the plaintiffs had not pled demand excusal under Aronson?
Judgment was reversed. Plaintiffs pled grounds for demand excusal under Del. Ch. Ct. R. 23.1 as they pled facts supporting an inference that a majority of the board who approved the interested transaction they challenged could not consider a demand impartially by alleging that a director had a close friendship of over half a century with the interested party, and that consistent with that deep friendship, the director's primary employment (and that of his brother) was as an executive of a company over which the interested party had substantial influence; The facts pled about the director's friendship with the interested party and his business relationships could not be considered separately; The court was bound to draw all inferences in plaintiffs' favor. Plaintiffs' failure to undertake additional investigation under Del. Code Ann. tit. 8, § 220(b) could not be held against them.