Shareholders for Affiliated Computer Systems, Inc. (ACS), a Fortune 500 company in the information technology sector, filed suit against ACS and certain of its directors in Delaware state court in early 2007. See In Re Affiliated Computer Services Shareholder Litigation, No. 2821-VCL. This litigation arose out of a proposed going-private transaction initiated by ACS’s founder and Chairman, Darwin Deason, and a private equity firm, Cerberus Capital Management. Notably, during the litigation, ACS’s independent directors formed a special committee that raised certain concerns about the proposed transaction. Subsequently, the proposed buyout was abandoned and Mr. Deason publicly accused the independent directors of breach of fiduciary duty. In response, the independent directors brought litigation seeking a declaratory judgment that their actions had been proper. After taking steps to secure replacement candidates, the independent directors resigned from their positions at ACS.
Even though the proposed buyout litigation was abandoned and the independent director defendants were no longer employed by ACS, the plaintiffs continued to pursue their shareholder derivative claims. The defendants moved to dismiss on the grounds that the litigation did not adequately allege demand futility with regard to the board in place when the litigation was initially filed (the plaintiffs conceded that there was no demand futility with regard to the current board). On February 6, 2009, the court granted the defendants’ motion to dismiss on lack of demand futility grounds.
In deciding this demand futility motion, the court applied the standard set forth by the Delaware Supreme Court in 1984 in the Aronson v. Lewis case. Under this standard, demand is deemed futile if there is a reasonable doubt that (1) “the directors are disinterested and independent” or (2) “the challenged transaction was otherwise the product of a valid exercise of business judgment.” In ruling on the ACS defendants’ motion, the court held that the plaintiffs had failed to allege the necessary “particularized factual allegations” from which the court could infer that the independent directors were neither disinterested nor independent. The court also specifically addressed the plaintiffs’ argument that given that the independent directors were preparing to resign following “internal warfare” with Mr. Deason, they could not be expected to protect the shareholders’ interests. The court ruled that the plaintiffs had failed to adequately allege that the independent directors had abandoned their duties to the shareholders given the independent directors’ apparent efforts to find qualified replacements in advance of tendering their resignations. Finally, the court found that the plaintiffs had failed to allege that the challenged transaction was not the product of the exercise of valid business judgment because the plaintiffs’ allegations essentially amount to “Monday morning quarterbacking.”