Delaware Supreme Court Adopts Unified Demand Futility Test

Published date18 October 2021
Subject MatterLitigation, Mediation & Arbitration, Trials & Appeals & Compensation
Law FirmWillkie Farr & Gallagher LLP
AuthorMr Tariq Mundiya, Sameer Advani, Jeffrey B. Korn, Todd G. Cosenza, Elizabeth Bower, Charles Dean Cording, Shaimaa M. Hussein and Vanessa C. Richardson

For nearly two decades, the question of whether a formal demand on a company's board of directors was required before a stockholder could pursue derivative litigation on behalf of a corporation was governed by two tests under Delaware law. Where the derivative claims challenged an affirmative decision by the board of directors who would consider the demand, the two-part test under Aronson v. Lewis1 applied. In all other contexts, courts would apply the test articulated in Rales v. Blasband. 2 On September 23, 2021, in United Food and Commercial Workers Union v. Zuckerberg, the Delaware Supreme Court affirmed and adopted the approach taken by the Court of Chancery in the proceedings below that unified the two tests into a single three-pronged inquiry. 3 In doing so, the Delaware Supreme Court acknowledged that significant changes in Delaware law since Aronson was decided had "eroded the ground upon which [the Aronson] framework rested" and, as a result, justified refining the test to "refocus" the inquiry "on the decision regarding the litigation demand, rather than the decision being challenged." Although the Delaware Supreme Court expressly noted that Aronson, Rales (and subsequent cases that applied them) were not being overruled, its adoption of the new unified test will streamline the analytical framework applicable to the often-litigated question of whether pre-suit demand on the board should be excused as futile.

The Existing Framework for Assessing Demand Futility Under Delaware Law

Under Court of Chancery Rule 23.1, a stockholder seeking to assert derivative claims on behalf of a corporation must plead particularized facts showing either that (1) the stockholder has made a demand on the board of directors to pursue the litigation and the board wrongfully refused the demand; or (2) making a demand would have been futile because a majority of the board could not impartially make a decision regarding the litigation. Until the Delaware Supreme Court's opinion in Zuckerberg, there were two tests under Delaware law used to determine whether a stockholder had adequately pleaded demand futility. Under the Aronson test, which applied where the stockholder sought to challenge a decision by the same board that would consider the demand, the complaint had to plead facts creating 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 R...

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