Shareholder plaintiffs asserted derivative claims against the directors of Xethanol Corporation, an ethanol producer, alleging, among other things, that the directors breached their fiduciary duties by allowing the Company to misrepresent its ability to produce ethanol from non-traditional sources. Asserting that demand would have been futile, the shareholder plaintiffs commenced the derivative action without first making a demand on the Company’s Board to bring suit on their behalf. The federal District Court for the Southern District of New York dismissed the case, holding that plaintiffs failed to allege with sufficient particularity the factual basis for failing to make a demand.
Plaintiffs claimed that the demand requirement was excused because a majority of the Board would have been incapable of exercising disinterested and independent judgment in response to such a demand. Rejecting this argument, the Court found that plaintiffs’ conclusory allegations that Board members were not “disinterested and independent” were insufficiently particularized to demonstrate that a demand would have been futile. The Court held, among other things, that the mere fact that a director sat on the Board at the time of the alleged wrongdoing was insufficient to show that the director “face[d] a ‘substantial likelihood’ of personal liability that would prevent him from impartially considering a demand.” (In re Xethanol Corp. Derivative Litigation, No. 06 Civ. 15536 (HB), 2007 WL 2331975 (S.D.N.Y. Aug. 16, 2007))