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Posted: January 24, 2016

When a Majority of Directors in Derivative Action Are Independent, Demand is Not Excused

On January 14, 2016, the First Department issued a decision in Wandel v. Dimon, 2016 NY Slip Op. 00252, holding that when the majority of the directors of a Delaware corporation are independent, demand is not excused in a derivative action because of allegations that some directors declined to investigate a matter for fear that it would uncover their own liability, explaining:

Under Delaware law, in order for a derivative suit to go forward, a shareholder must either make pre-suit demand on the corporation or seek to be excused from making a demand on grounds of futility.

Plaintiffs’ claim, based on the Board’s alleged failure to properly exercise its oversight duties, is premised on the theory of liability articulated in In re Caremark Intl. Inc. Derivative Litig. Under Caremark, where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard of their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith. . . . .

. . .

In Caremark cases, allegations of demand futility are analyzed under the principles set forth in Rales v Blasband. Under Rales, the plaintiff must plead particularized facts raising a reasonable doubt that, at the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. To rebut the presumption of disinterestedness, the plaintiff must plead particularized facts that, if proved, would establish that a majority of the directors face a substantial likelihood of personal liability for the wrongdoing alleged in the complaint. A mere threat of liability is insufficient.

Here, plaintiffs failed to make the requisite showing that the board could not exercise independent business judgment because a majority of directors faced a substantial likelihood of liability for the challenged conduct. At the time plaintiffs filed their complaint, the board consisted of 11 directors. At most, plaintiffs showed that four of them — inside director Dimon and the three members of the Risk Policy Committee — faced a substantial likelihood of liability. Because a majority of the directors are independent, demand is not excused.

(Internal quotations and citations omitted) (emphasis added).

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