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The Corporate CounselorFeaturesGeneral Counsel and In House CounselLitigationLJN Newsletters

Director Independence to Consider Pre-Suit Demand

By Joseph M. McLaughlin and Yafit Cohn

Universally known as the demand requirement, Delaware Chancery Rule 23.1 compels dismissal of any shareholder derivative complaint that does not allege with particularity the efforts taken by the plaintiff to demand the desired action by the board or, alternatively, facts explaining that a demand was not made because it would have been futile.

In a decision written by Chief Justice Leo E. Strine Jr., for the second time in 15 months, the Delaware Supreme Court in December 2016 reversed a Court of Chancery decision dismissing a derivative complaint for failure to plead demand excusal. In Sandys v. Pincus, 2016 WL 7094027 (Del. Dec. 5, 2016), the court held that the shareholder plaintiff had offered allegations creating reasonable doubt as to a majority of the board's independence to consider a demand to bring suit. Like the Delaware Supreme Court's 2015 decision in Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017 (Del. 2015), Sandys signals that Delaware courts will closely scrutinize personal and business relationships that are asserted as compromising a director's ability to consider a pre-suit demand impartially.

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