Document: TVI Corporation v. Bernard Gallagher, C.A. No. 7798-VCP (Del Ch. October 28, 2013)

The Court held that shareholders’ claims were not subject to dismissal for failure to make a demand on the board because they had sufficiently pleaded facts that a majority of the directors who voted in favor of the actions challenged in the suit were either personally interested in the decision, or controlled by a party who was interested.  Claims for breach of the duty of loyalty also survived.  The Court noted that determining whether a director is independent or interested is often a difficult and fact-specific inquiry.

The challenged actions included: (i) entering and approving employment agreements between the corporation and three of the defendants that wasted corporate assets; (ii) the retroactive approval of financing from one of the founders on preferential terms; and (iii) removing directors chosen by the shareholders to prevent the founders’ actions from receiving closer scrutiny.  When the court examined the challenged transactions in isolation, it found that one director was interested in each one of them, which would not be enough to establish demand futility as to the entire board.  The Court found, however, that the facts pled by the shareholder plaintiffs supported “an inference that these transactions were interrelated. . . . The facts alleged in the Complaint support a reasonable inference that the Founders may have leveraged their control over the Company to benefit one another in an ‘I’ll scratch your back, you scratch mine’ type of relationship.”  Therefore, demand was excused, and the Court denied the motion to dismiss the breach of the duty of loyalty claims.