The Delaware Supreme Court reversed a Delaware Court of Chancery decision that dismissed a derivative complaint based on the plaintiff-shareholder’s failure to make a pre-suit demand on the Company’s board of directors. The Court of Chancery had determined that because the majority of the board was independent, the plaintiff-shareholder was required to make a demand on the Board to file suit on behalf of the Company. On appeal, the Delaware Supreme Court disagreed and found that the plaintiff-shareholder had shown that the majority of the board of directors was conflicted and thus a pre-suit demand was not necessary. The Court’s decision was based on several different conflicts amongst three board members, including the co-ownership of an airplane between one director and the controlling stockholder of the company, and two other directors’ “interlocking” financial ventures and relationships with the controlling shareholder. Notably, the Court admonished the plaintiff for failing to direct a books and records request to the Company on issues bearing on the board members’ independence, finding that “the plaintiff‘s lack of diligence put the Court of Chancery in a compromised and unfair position to make an important determination regarding these directors’ pleading stage independence.”
BOTTOM LINE: Delaware courts will review the independence of directors in as detailed a fashion as they review the independence of financial advisors. As a result, plaintiffs must be extremely diligent in their review of a board’s independence before determining that a pre-suit demand on the board is unnecessary.