C.A. No. 2821-VCL (Del. Ch. Feb. 6, 2009)
In this decision, the Court of Chancery dismissed a derivative complaint for failure to plead demand excusal under Chancery Court Rule 23.1 in a context in which the composition of the board of directors had changed considerably between the filing of the first and second amended complaints.
Plaintiffs, stockholders of Affiliated Computer Services, Inc. (“ACS”), filed their initial complaint to enjoin a proposed going-private transaction put forward by Darwin Deason, the founder, chairman and a significant stockholder of ACS, and a private equity firm. When the deal collapsed and the private equity firm withdrew its offer, the plaintiffs amended their complaint to bring derivative claims alleging breach of fiduciary duty against the entire board. Plaintiffs later amended their first amended complaint to supplement its factual allegations. In this decision, the Court considered whether plaintiffs’ second amended complaint adequately pleaded that demand was excused under Rule 23.1.
The Court first addressed the novel context of the case. After the proposed transaction fell apart, Deason demanded the immediate resignations of ACS’s five outside directors. The outside directors resigned approximately one month later. When plaintiffs filed their second amended complaint, ACS’s new board was in office. Because of the shift in board membership, the threshold issue for the Court was whether demand excusal should be considered with respect to ACS’s new board or with respect to ACS’s old board. Under Delaware law, if the claims presented in the second amended complaint were already “validly in litigation” by virtue of the first amended complaint, then demand excusal would be considered as of the time the first amended complaint was filed, and thus with respect to ACS’s old board. However, if the claims presented in the second amended complaint were not validly in litigation at the time of the first amended complaint, then demand excusal would be considered with respect to ACS’s new board, which was wholly independent. Accordingly, plaintiffs could avoid dismissal of their complaint only by showing that demand excusal should be considered with respect to ACS’s old board. Under Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006), claims in an amended derivative complaint are “validly in litigation” and thus a plaintiff is not required to make demand or to show demand futility as of the time of his amended complaint where (1) the original complaint was well-pleaded as a derivative action; (2) the original complaint satisfied the legal test for demand excusal; and (3) the act or transaction complained of is essentially the same as the act or transaction challenged in the original complaint. Because plaintiffs and defendants admitted that the first and third prongs of the Braddock analysis were satisfied, the Court addressed only whether the first amended complaint satisfied the legal test for demand excusal at the time it was filed, and concluded that under Aronson, it did not. Accordingly, under Braddock, the claims in the second amended complaint were not validly in litigation, and plaintiffs were required either to make demand at the time they filed their second amended complaint, or to plead that demand would be futile at that time, and therefore excused. Because they had not done so, the Court dismissed the second amended complaint.
The full opinion is available here.