Shareholder Derivative Action Delaware

"A basic principle of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation. 'The exercise of this managerial power is tempered by fundamental fiduciary obligations owed by the directors to the corporation and its shareholders.' The decision to bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation. Consequently, such decisions are part of the responsibility of the board of directors." (Spiegel v. Buntrock (Del. 1990) 571 A.2d 767, 772-773 (Spiegel).)

" 'Because the shareholders' ability to institute an action on behalf of the corporation inherently impinges upon the directors' power to manage the affairs of the corporation the law imposes certain prerequisites on a stockholder's right to sue derivatively.'

Delaware Chancery Court Rules, rule 23.1(a) provides, in part: "The complaint shall ... allege with particularity the efforts, if any, ... to obtain the action the plaintiff desires from the directors ... and the reasons for the plaintiff's failure to obtain the action or for not making the effort."

Chancery Court Rule 23.1 requires that shareholders seeking to assert a claim on behalf of the corporation must first exhaust intracorporate remedies by making a demand on the directors to obtain the action desired, or to plead with particularity why demand is excused.

The purpose of pre-suit demand is to assure that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation, to decide whether to invest the resources of the corporation in litigation, and to control any litigation which does occur." (Spiegel, supra, 571 A.2d 767, 773.)

California law is similar to that of Delaware. Corporations Code section 800, subdivision (b)(2) requires that the plaintiff in a shareholder derivative suit "allege in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and allege further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file."

Courts generally accord some deference to a corporation's decision to refuse a shareholder's demand: "Since a conscious decision by a board of directors to refrain from acting may be a valid exercise of business judgment, 'where demand on a board has been made and refused, courts apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand' to file a lawsuit. The business judgment rule is a presumption that in making a business decision, not involving self-interest, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. 'The burden is on the party challenging the decision to establish facts rebutting this presumption.' Thus, the business judgment rule operates as a judicial acknowledgement of a board of directors' managerial prerogatives." (Spiegel, supra, 571 A.2d 767, 773-774.)