In this memorandum opinion, the Court of Chancery granted a motion to dismiss Plaintiff’s derivative complaint under Court of Chancery Rule 23.1, and in doing so, confirmed that there is a heavy burden confronting derivative plaintiffs who seek to challenge a board’s decision to refuse a demand. Plaintiff, an E. I. du Pont de Nemours (“DuPont”) stockholder, made a demand on DuPont’s board (the “Board”), demanding that it investigate and take action to remedy alleged wrongdoing by several DuPont directors and officers (“Defendants”) relating to a costly contractual and intellectual property dispute with Monsanto Company (“Monsanto”). DuPont’s dispute with Monsanto resulted in a $1.2 billion jury award against DuPont, as well as a sanctions order that required DuPont to pay a portion of Monsanto’s legal fees. DuPont and Monsanto subsequently settled the lawsuit. Plaintiff’s demand alleged that Defendants breached their fiduciary duties to DuPont by mishandling the lawsuit and the events leading up to it. After an independent committee investigated these claims, the Board determined that there were no grounds for suing Defendants and, even if there were, doing so would not be in DuPont’s best interest. In response, Plaintiff filed this derivative action to prosecute the claims in its demand against Defendants on behalf of DuPont. Defendants filed a motion to dismiss under Court of Chancery Rule 23.1, contending that Plaintiff lacked standing to bring a derivative lawsuit because they had not satisfied their burden of adequately pleading that their demand had been wrongfully refused.
In evaluating whether Plaintiff had standing under Rule 23.1, the Vice Chancellor noted that where, as here, a stockholder has already made a demand, the stockholder has conceded that the Board was capable of exercising its business judgment in considering that demand. Accordingly, the Court explained that it would only second-guess the Board’s decision to refuse the demand if Plaintiff’s particularized allegations rebutted the business judgment rule by showing that the Board’s decision was an exercise of gross negligence or bad faith.
The Vice Chancellor ultimately granted Defendant’s motion to dismiss under Rule 23.1 because Plaintiff failed to meet this rigorous standard. First, the Court found that the Board’s decision to refuse the demand was not grossly negligent, i.e. uninformed. The Court explained that the Board was sufficiently informed because it commissioned an independent committee to investigate Plaintiff’s claims through interviews, extensive document review, and reviewing depositions and the trial record from the underlying litigation with Monsanto – a process that resulted in a 179-page report. This comprehensive report was then considered and accepted by the full Board.
Second, Plaintiff did not successfully plead bad faith. To establish bad faith, Plaintiff needed to allege facts that went "beyond showing a questionable or debatable decision on [the Board’s] part.” Rather, Plaintiff needed to show that the Board’s decision to refuse the demand was “inexplicable” such that the Board could not have been acting in good faith. Plaintiff’s allegations fell far short of this threshold. The Vice Chancellor characterized Plaintiff’s bad faith argument as “a species of res ipsa loquitur” that presumed that because the Monsanto litigation was so needlessly costly and damaging for DuPont, it followed, in plaintiff’s view, that somebody must have breached their fiduciary duties. The Court rejected this argument because it was essentially irrelevant to the wrongful refusal analysis. What mattered in the analysis, the Court explained, was not the propriety of the underlying conduct nor even whether the Board made a wise decision; the only relevant inquiry was whether the Board “acted in good faith and absent gross negligence” in refusing Plaintiff’s demand.
Because Plaintiff failed to plead sufficient facts to meet the stringent burden under Rule 23.1, the Court granted Defendant’s motion to dismiss.
The full opinion is available here