Del. R. Ch. Ct. 23.1

As amended through September 30, 2024

Rule 23.1 - Derivative Actions for Entities with Separate Legal Existence

(a)Pleading Requirements. The complaint in a derivative action must:

(1) state with particularity:

(A) any effort by the derivative plaintiff to obtain the desired action from the entity; and

(B) the reasons for not obtaining the action or not making the effort; and

(2) allege facts supporting a reasonable inference that the derivative plaintiff has standing to sue derivatively under the law governing the entity.

(b)Affidavit from Derivative Plaintiff.

(1) A person seeking to serve as a derivative plaintiff must file an affidavit within 10 days after filing any of the following:

(A) a complaint;

(B) a motion to intervene; or

(C) a motion seeking appointment as a derivative plaintiff.

(2) The affidavit must state that the person has not received, been promised, or been offered-and will not accept-any form of compensation, directly or indirectly, for serving as a derivative plaintiff, except for:

(A) the indirect benefit from any damages or other relief that the Court may award to the entity;

(B) a ratable share of any damages or other relief that the Court may award;

(C) any fees, costs, or other payments that the Court expressly approves to be paid to or on behalf of the person; or

(D) reimbursement from the person's attorneys of actual and reasonable out-of-pocket expenditures incurred in prosecuting the action.

(c)Derivative Plaintiffs and Derivative Counsel.

(1)Derivative Plaintiffs.

(A) A person may serve as a derivative plaintiff if:

(i) The person has standing to sue derivatively under the law governing the entity; and

(ii) The person can fairly and adequately represent the interests of the entity in pursuing the derivative action.

(B) If only one person has sued derivatively but cannot adequately represent the interests of the entity in pursuing the derivative action, then the Court must dismiss the derivative action without prejudice. But an alternative derivative plaintiff may move to intervene within 60 days and continue the action.

(2)Derivative Counsel. A derivative plaintiff must be represented by counsel. Derivative counsel must fairly and adequately represent the interests of the entity in pursuing the derivative action.

(3)Disputed Appointments.

(A) The Court may resolve disputes over the appointment of derivative counsel, including who can best represent the interests of the entity in pursuing the derivative action, and may make further orders in connection with the appointment.

(B) When selecting derivative counsel, the Court may consider:

(i) counsel's competence and experience;

(ii) counsel's access to the resources necessary to prosecute the litigation;

(iii) the quality of the pleading;

(iv) counsel's performance in the litigation to date;

(v) the proposed leadership structure;

(vi) the derivative plaintiff's relationship to and interest in the entity;

(vii) any conflicts between counsel or the derivative plaintiff and the entity; and

(viii) any other matter pertinent to ability of counsel or the derivative plaintiff to fairly and adequately represent the interests of the entity in the derivative action.

(C) The Court may:

(i) order any applicant to provide information on any subject pertinent to the application and to propose terms for attorney's fees and expenses; and

(ii) include in the appointing order provisions about the award of attorney's fees or expenses.

(4)Replacement of Derivative Plaintiff or Derivative Counsel. If a derivative plaintiff or derivative counsel fails to adequately represent the interests of the entity in pursuing the derivative action, then the Court may dismiss the derivative action without prejudice, replace the derivative plaintiff or derivative counsel, or make further orders as warranted.

(d)Dismissal or Settlement.

(1)In General. Subject to Rule 15(a)(5), a derivative action may be dismissed or settled only if the Court approves the terms of the proposed dismissal or settlement.

(2)Required Submissions. The parties submitting the proposed dismissal or settlement must file:

(A) a further affidavit from each derivative plaintiff that meets the requirements of Rule 23.1(b)(2);

(B) if a dismissal, a proposed form of order stating the terms on which the action will be dismissed; or

(C) if a settlement, the definitive agreement governing the settlement.

(3)Notice. Notice of the proposed dismissal or settlement must be given in the manner directed by the Court.

(A)Dismissal Without Notice. But the Court may order dismissal without notice if the dismissal is to be without prejudice or with prejudice to the derivative plaintiff only.

(B)Information About Notice. The parties must provide the Court with information sufficient to rule on whether to require notice and in what form.

(C)Means of Notice. Notice may be given by any appropriate means approved by the Court, including first-class U.S. mail, email, or publication.

(D)Contents of Notice. Unless the Court orders otherwise, the notice of a proposed dismissal or settlement must clearly and concisely state, in plain, easily understood language:

(i) the location, date, and time of any hearing;

(ii) the nature of the action;

(iii) a summary of the claims, issues, defenses, and relief that the derivative action sought;

(iv) a description of the terms of the proposed dismissal or settlement;

(v) any award of attorney's fees or expenses, or any derivative-plaintiff award, that will be sought if the proposed dismissal or settlement is approved;

(vi) instructions for objectors;

(vii) that additional information can be obtained by contacting derivative counsel;

(viii) how to contact derivative counsel; and

(ix) not to contact the Court with questions about the terms of the proposed dismissal or settlement.

(4)Objections.

(A)In General. Any person situated similarly to the derivative plaintiff may object to the proposed dismissal or settlement. The objection must state with specificity the grounds for and purpose of the objection.

(B)Court Approval Required for Payment in Connection with an Objection. Unless approved by the Court after a hearing, no payment or other consideration may be provided in connection with:

(i) forgoing or withdrawing an objection, or

(ii) forgoing, dismissing, or abandoning an appeal from the judgment approving the proposed dismissal or settlement.

(C)Taking over Case After Providing Adequate Security. The Court may allow an objector to substitute as a derivative plaintiff if:

(i) the objector satisfies the requirements for a derivative plaintiff in Rule 23.1; and

(ii) if the proposed dismissal or settlement would provide relief to the entity, the objector provides adequate security.

(5)Approval of Proposed Settlement. The Court may approve a proposed settlement only after a hearing and only on finding:

(A) the derivative plaintiff and derivative counsel adequately represented the entity;

(B) adequate notice of the hearing was provided;

(C) the proposed settlement was negotiated at arm's length;

(D) the relief falls within a range of reasonable results, taking into account:

(i) the strength of the claims;

(ii) the costs, risks, and delay of trial and appeal;

(iii) the scope of the release; and

(iv) any objections to the proposed settlement.

(e)Attorney's Fees, Expenses, and Derivative-Plaintiff Awards.

(1) In a derivative action, the Court may award reasonable attorney's fees and expenses to derivative counsel.

(2) Any person from whom payment is sought may oppose the award, and any person with standing to object to a proposed dismissal or settlement may object to the award.

(3) Any counsel who will share in the award of attorney's fees and expenses must submit an affidavit documenting their fees and expenses.

(4) The Court may authorize derivative counsel to pay a reasonable award to a derivative plaintiff out of any award of attorney's fees.

(f)Definitions. For purposes of Rule 23.1:

(1) "derivative action" means an action on behalf of an entity to enforce a claim that the entity could assert;

(2) "derivative counsel" means a counsel representing a derivative plaintiff in pursuing a derivative action on behalf of an entity;

(3) "derivative plaintiff" means a person pursuing a derivative action; and

(4) "entity" means an entity with a separate legal existence, including a corporation, limited liability company, limited partnership, general partnership with entity status, common law trust, or statutory trust.

Del. R. Ch. Ct. 23.1

Amended September 25, 2023, effective 9/25/2023;amended May 31, 2024, effective 6/14/2024; amended July 12, 2024, effective 7/12/2024.

Comment To Revisions Effective as of June 14, 2024

In 2024, Rule 23.1(d)(1) was amended after revisions to Rule 15. The revisions to Rule 15 had renumbered prior Rule 15(aaa) as Rule 15(a)(5). The amendment to Rule 23.1(d)(1) updated the cross reference.

Comment to Revisions Effective as of September 25, 2023

In 2023, Rule 23.1 was revised to align its language in certain respects with Federal Rule 23.1 so that authorities interpreting the federal rule could be cited more easily as persuasive authority for the interpretation of Rule 23.1. The revision added elements modeled on current practice and on Federal Rule 23.

Except as noted, no substantive change in the interpretation of Rule 23.1 or the law governing derivative actions is intended. Prior Delaware authorities interpreting the rule and the law governing derivative actions remain applicable.

The revision replaces the term "compromise" with "settlement." The revision applies to all entities with a separate legal existence and to any derivative plaintiff.

The revision specifies requirements for notice of a proposed dismissal or settlement.

The revision requires Court approval for any payment or other consideration provided in connection with the forgoing or withdrawal of an objection.