Levine v. Smith

591 A.2d 194 (Del. 1991)

 

RULE:


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. 

FACTS:

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.

ISSUE:

Did the trial court err in dismissing the actions initiated by the shareholders?

ANSWER:

No.

CONCLUSION:

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.

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