A shareholder derivative suit alleging that a majority of the Board of Directors of Aspen Technologies (Aspen) abdicated their fiduciary duty by awarding backdated stock options was dismissed because the plaintiff failed to adequately plead “demand futility,” i.e., that plaintiff was excused from demanding that the Board assert the backdating claim because, under the circumstances, making such a demand would have been futile.
The plaintiff argued that the demand requirement was excused because, among other things, (i) a majority of the Board participated in the award of the backdated option grants, and (ii) a majority of the Board faced a substantial likelihood of liability based on their service on the Audit Committee at a time when, based on Aspen’s subsequent admissions, the Company acknowledged having issued mistaken financial statements arising from their treatment of the backdated options.
The Court first found that, to avoid the demand requirement, the plaintiff must allege particularized facts creating a “reasonable doubt” that, at the time the Complaint was filed, a majority of a board of directors could have exercised independent and disinterested business judgment in responding to a litigation demand. The Court then rejected Plaintiff’s claim of “demand futility.” The Court ruled that rather than comply with its burden to allege facts showing that a majority of the directors were on the Board at the time of the backdated grants, the complaint asked the Court to “assume” this to be the case. Similarly, the Court found that the mere fact that the members of the Board on the Audit Committee did not detect errors in the financial statements sooner failed to establish that such directors faced “a substantial likelihood of liability” if the proposed claims were litigated – a standard required by the Court to establish that a director was not “disinterested.” (Aspen Technology, Inc. v. McArdle, 2008 WL 54815 (Jan. 4, 2008 D. Mass.))