473 A.2d 805 (Del. 1984). 634 A.2d 927 (Del. 1993).Aronson, 473 A.2d at 811.Lenois v. Lawal, 2017 WL 5289611, at *9 (Del.
Defendants argue that the derivative claim against Razdan should be dismissed because plaintiff failed to adequately plead futility. To demonstrate demand futility, plaintiff need only allege particularized facts that create a reasonable doubt that C & W's directors at the time of the complaint can be disinterested with respect to a demand to bring the derivative claims on behalf of C & W (see Rales v Blasband, 634 A2d 927, 934 [Del 1993]). Where a board has only two directors at the time of the complaint, demand futility is established where at least one of the directors is interested (see Beneville v York, 769 A2d 80, 84-87 [Del Ch 2000]).
United Food & Commercial Workers Union & Participating Food Ind. Emp'rs Tri-State Pension Fund v. Zuckerberg, No. 404, 2020, __ A.3d __, 2021 WL 4344361 (Del. Sept. 23, 2021) (Zuckerberg).Aronson v. Lewis, 473 A.2d 805 (Del. 1984).Rales v. Blasband, 634 A.2d 927 (Del. 1993).Zuckerberg, 2021 WL 4344361, at *14.Id. at *7 (citing Aronson, 473 A.2d at 814).Id. (citing Rales, 634 A.2d at 934).Id.Id. at *1.Id. at *15 (quoting United Food & Commercial Workers Union v. Zuckerberg, 250 A.3d 862, 890 (Del. Ch. 2020)).Id. at *8–12.Id. at *19–21.Id. at *16.Id. at *17.Id.Id. at *16.Id. at *13.Id.Id. at *12; seealso id., discussing, inter alia, In re Cornerstone Therapeutics, Inc. S'holder Litig., 115 A.3d 1173, 1175 (Del. 2015) (holding that a plaintiff "seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct").Id. at *18 (quotations omitted).Id. at *13 (quoting Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, No.CV 9503-CB, 2015 WL 4192107, at *1 (Del. Ch. July 13, 2015)).
Moreover, the court also held that because in this case EZCorp’s audit committee did approve the agreements, the burden of proof – which under the entire fairness review normally lies with the defendants – could potentially be shifted back to the plaintiff.Demand Futility Upheld The court also upheld the plaintiff’s contention that demand on EZCorp was excused under the standard set forth in Rales v. Blasband, 634 A.2d 927 (Del. 1993), because there was a reasonable doubt as to whether a majority of EZCorp’s directors “could have properly exercised [their] independent and disinterested business judgment in responding to a demand.” Opinion at 68, quoting Rales, 634 A.2d at 934.
If the answer to any of the questions is "yes" for at least half of the members of the demand board, then demand is excused as futile.”(Ibid.) This new test supersedes the tests for demand futility adopted by the Delaware Supreme Court in Aronson v. Lewis,473 A.2d 805 (Del. 1984) andRales v. Blasband, 634 A.2d 927 (Del. 1991).California courts have applied bothAronson (Bader v. Anderson,179 Cal. App. 4th 775 (2009)) and Rales (Leyte-Vidal v. Semel,220 Cal. App. 4th 1001 (2013)).
An employee relationship with the corporation also raises doubt that a director would act independently, particularly when the income derived from that position is substantial or the director’s primary source of income. Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993) (“there is a reasonable doubt that [an employee director] can be expected to act independently considering his substantial financial stake in maintaining his current offices.”); Mizel, 1999 WL 550369, at *3 (“Since [the employee-directors] each derive their principal income from their employment at [the corporation], it is doubtful that they can consider the demand on its merits without also pondering whether an affirmative vote would endanger their continued employment.”)A financial relationship between the director’s business and the corporation is sufficient to raise doubt regarding that directors ability to remain independent.
34 The complaint was dismissed without prejudice.Although such lawsuits have not found much traction, companies and their boards should continue to carefully examine the diversity of their directors and officers as well as individuals in management positions overseeing diversity efforts.Footnotes1)United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., No. 404, 2020, --- A.3d ----, 2021 WL 4344361 (Del. Sept. 23, 2021).2) 473 A.2d 805 (Del. 1984).3) 634 A.2d 927 (Del. 1993).4)Zuckerberg, 2021 WL 4344361, at *16.5)Id. at *15-16.6)Id. at *16-17.7) No. 406, 2020, 2021 WL 4260639 (Del. Sept. 20, 2021).8) 906 A.2d 91 (Del. 2006).
The 2014 demand committee released a report in 2019 detailing its findings and ultimately concluded it was not in the best interests of FedEx to bring a lawsuit against its directors and officers.Analyzing demand futility under Rales v. Blasband, 634 A.2d 927 (Del. 1993), the court noted that the plaintiff was required to plead particularized facts sufficient to create a reasonable inference that a majority of the demand board faced a “substantial likelihood of liability” for his or her role in the alleged corporate wrongdoing. In order to plead a derivative claim for director oversight liability under Caremark, a plaintiff must sufficiently allege either that (i) the directors utterly failed to implement any reporting or information system or controls; or (ii) having implemented such controls, the directors consciously failed to monitor or oversee their operation.
In all other circumstances, the Rales test applies. Under the Rales test (from Rales v. Blasband, 634 A.2d 927 (Del. 1993)), the question is whether, as of the time the complaint is filed, a majority of the demand board could have properly exercised its independent and disinterested business judgment in responding to a demand. But when the members of the board change between the challenged decision and the demand, there is a gap in the framework.
See Genworth Financial, Inc. Consolidated Derivative Litigation, C.A. No. 11901-VCS, 2021 WL 4452338, at *16 (Del. Ch. 29 Sept., 2021) (dismissing derivative lawsuit and noting that the Tri-State test resolved prior conflicting authority on whether purposeful inaction by a board was analyzed under the Aronson or Rales framework).1 473 A.2d 805 (Del. 1984).2 Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).3 Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).