The focus of a complaint alleging wrongful refusal of demand is different from the focus of a complaint alleging demand futility. The legal issues are different; therefore, the legal standards applied to the complaints are necessarily different. A shareholder plaintiff, by making demand upon a board before filing suit, tacitly concedes the independence of a majority of the board to respond. Therefore, when a board refuses a demand, the only issues to be examined are the good faith and reasonableness of its investigation.
Appellant shareholders initiated actions against board of directors and others and challenged corporation's repurchase from its largest shareholder, all of shareholder's stock in a certain class, as well as contingency notes, of a wholly-owned subsidiary. The trial court dismissed the actions. On review, the court affirmed the dismissal.
Did the trial court err in dismissing the actions initiated by the shareholders?
In considering the first action, the Court held that shareholder's claim failed to state a claim of demand futility. The Court further explained that shareholder's complaint failed to plead with particularity facts which would raise a reasonable doubt of director disinterest and independence or that the challenged transaction was otherwise the product of a valid exercise of business judgment. In considering the second action, the Court held that shareholder's complaint failed to allege particularized facts sufficient to create a reasonable doubt that the corporation's outside directors were either manipulated or misled by management or were so uninformed as to fail to exercise due care. Thus, dismissal was appropriate.