demand requirement in Delaware

2025Stated differently, if the demand rule requires deference to the prerogative of management, its invocation must advance management’s position, vis-a-vis, the claims in question, otherwise, the rule serves no function.101 Built on Delaware’s board-centric foundation, Kaplan v. Peat, Marwick, Mitchell & Co. explains a company’s enunciated position on a derivative claim takes precedence over the Court’s Rule 23.1 assessment of the position the company might be able to take.102 In keeping with that precept, the Delaware Supreme Court held that “when a corporation chooses to state its position in r

2025Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950 , 952 9 suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.”20 Because derivative litigation encroaches on the managerial freedom of directors, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the direct

2024R. 23.1(a); Rales v. Blasband, 634 A.2d 927 , 934–35 n.10 (Del. 1993) (encouraging pre-suit investigations to meet the demand requirement). 119 8 Del.

2021McElrath v. Kalanick, 224 A.3d 982 (Del. 2020). 207 Rales, 634 A.2d at 934, 936 (noting that, at bottom, the court must “determine whether or not the particularized factual allegations of a derivative stockholder complaint create a 63 “On a motion to dismiss pursuant to Rule 23.1, the Court considers the same documents, similarly accepts well-pled allegations as true, and makes reasonable inferences in favor of the plaintiff—all as it does in considering a motion to dismiss under Rule 12(b)(6).”208 Given the heightened pleading requirements of Rule 23.1, however, “conclusory allegations of fac

2017McGinnis Plaintiff argues that McGinnis lacks the independence and disinterest necessary to consider a demand because (1) the HLSS acquisition was “critical for HLSS,” and thus he “would decline to pursue any corrective action that could diminish the benefits he previously secured for HLSS” as the former chairman of the HLSS board; (2) he would not want to undermine the “significant reputational benefits among his peers in the mortgage industry and among HLSS’s investors” he 102 Compl. ¶ 167. 103 For purposes of this Motion to Dismiss, Plaintiff and Defendants briefed the demand analysis based

2016Servs., Inc., 500 U.S. 90, 96-97 (1991) (“[T]he function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of ‘substance,’ not ‘procedure,’”); Braddock v. Zimmerman, 906 A.2d 776, 784 (Del. 2006) (“The demand requirement of Rule 23.1 is a substantive right . . . .” (quotation marks omitted)); Ainscow, 180 A. at 615 (“The question of whether a stockholder may act as a volunteer in taking up the cudgels in behalf of his corporation . . . is one of his right and authority to act.”). 29

2020Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) (finding that a purpose of the demand requirement is to deter suits “where there is only a suspicion expressed solely in conclusory terms”) (quoting Grimes v. Donald, 673 A.2d 1207, 1217 (Del. 1996)). 11 conflict by a majority of the directors to consider the demand.”36 The demand futility test is highly dependent on the particularity of the facts alleged in the complaint.37 When a majority of directors at the time of the challenged conduct have been replaced, the demand futility test articulated in Rales v. Blas

2016Jan. 28, 2016) (TABLE). 46 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“[B]y promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations.”), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 47 See, e.g., Beam v. Stewart, 845 A.2d 1040, 1044 (Del. 2004). 48 Levine v. Smith, 1989 WL 150784 , at *5 (Del.

2025The demand requirement in Rule 23.1 “is a basic principle of corporate governance and is a matter of substantive law.” Grimes v. Donald, 673 A.2d 1207, 1216 (Del. 1996) (internal quotation marks omitted), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

2025Stated differently, if the demand rule requires deference to the prerogative of management, its invocation must advance management’s position, vis-a-vis, the claims in question, otherwise, the rule serves no function.101 Built on Delaware’s board-centric foundation, Kaplan v. Peat, Marwick, Mitchell & Co. explains a company’s enunciated position on a derivative claim takes precedence over the Court’s Rule 23.1 assessment of the position the company might be able to take.102 In keeping with that precept, the Delaware Supreme Court held that “when a corporation chooses to state its position in r

2026Servs., Inc., 500 U.S. 90 , 96–97 (1991) (holding that the demand requirement underlying Rule 23.1 is substantive, while the Rule 23.1 pleading requirement is procedural). 21 A. The Double Derivative Ownership Requirement The defendants first argue that because the Plaintiff Feeder Fund only holds a 48% interest in the Master Fund, the YWCA cannot assert double-derivative claims.

2020Servs., Inc., 500 U.S. 90 , 96–97 (1991) (holding that the demand requirement underlying Rule 23.1 is substantive, and the Rule 23.1 pleading requirement is procedural).

2025The demand requirement in Rule 23.1 “is a basic principle of corporate governance and is a matter of substantive law.” Grimes v. Donald, 673 A.2d 1207, 1216 (Del. 1996) (internal quotation marks omitted), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

2025Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950 , 952 9 suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.”20 Because derivative litigation encroaches on the managerial freedom of directors, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the direct

2019Aug, 30, 2019) (citing Zapata, 430 A.2d at 786 ). 40 directors would be able to bring their business judgment to bear on behalf of the corporation, with respect to the litigation at issue.227 Employing an apt verb, Vice Chancellor Slights in In re Clovis Oncology, Inc. Litigation noted that “[t]o wrest control over the litigation asset away from the board of directors, the stockholder must demonstrate that demand on the board to pursue the claim would be futile such that the demand requirement should be excused.”228 Recognizing the import of such tussles to the course of derivative litigation,

2014Ch. 2000). 11 making a demand on the board to undertake a corrective action, or (ii) by demonstrating that such a demand on the board would be futile and, therefore, the plaintiff should be excused from having to make demand.24 Where the plaintiff fails to comply with the demand requirement and fails to plead with particularity why demand would be futile, the complaint will be dismissed.25 When considering a motion under Rule 23.1, “the court need not blindly accept as true all allegations, nor must it draw all inferences from them in plaintiffs‟ favor unless they are reasonable inferences.”26

2025Stated differently, if the demand rule requires deference to the prerogative of management, its invocation must advance management’s position, vis-a-vis, the claims in question, otherwise, the rule serves no function.101 Built on Delaware’s board-centric foundation, Kaplan v. Peat, Marwick, Mitchell & Co. explains a company’s enunciated position on a derivative claim takes precedence over the Court’s Rule 23.1 assessment of the position the company might be able to take.102 In keeping with that precept, the Delaware Supreme Court held that “when a corporation chooses to state its position in r

2025Stated differently, if the demand rule requires deference to the prerogative of management, its invocation must advance management’s position, vis-a-vis, the claims in question, otherwise, the rule serves no function.101 Built on Delaware’s board-centric foundation, Kaplan v. Peat, Marwick, Mitchell & Co. explains a company’s enunciated position on a derivative claim takes precedence over the Court’s Rule 23.1 assessment of the position the company might be able to take.102 In keeping with that precept, the Delaware Supreme Court held that “when a corporation chooses to state its position in r

2025Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950 , 952 9 suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.”20 Because derivative litigation encroaches on the managerial freedom of directors, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the direct

2021Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); 33 seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.” 93 Because derivative litigation impinges on the managerial freedom of directors in this way, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regard

2016Where the plaintiff fails to comply with the demand requirement and fails to plead with particularity why a demand would be futile, the complaint will be dismissed.49 The Supreme Court in Aronson v. Lewis articulated a two-part test to show demand futility.50 The court must decide whether, given the particularized facts alleged, a ―reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.‖51 In order to be disinterested, a director ―can neither appear on both sides

2014Ch. 2000). 11 making a demand on the board to undertake a corrective action, or (ii) by demonstrating that such a demand on the board would be futile and, therefore, the plaintiff should be excused from having to make demand.24 Where the plaintiff fails to comply with the demand requirement and fails to plead with particularity why demand would be futile, the complaint will be dismissed.25 When considering a motion under Rule 23.1, “the court need not blindly accept as true all allegations, nor must it draw all inferences from them in plaintiffs‟ favor unless they are reasonable inferences.”26

2016Servs., Inc., 500 U.S. 90, 96-97 (1991) (“[T]he function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of ‘substance,’ not ‘procedure,’”); Braddock v. Zimmerman, 906 A.2d 776, 784 (Del. 2006) (“The demand requirement of Rule 23.1 is a substantive right . . . .” (quotation marks omitted)); Ainscow, 180 A. at 615 (“The question of whether a stockholder may act as a volunteer in taking up the cudgels in behalf of his corporation . . . is one of his right and authority to act.”). 29

2016Servs., Inc., 500 U.S. 90, 96-97 (1991) (“[T]he function of the demand doctrine in delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of ‘substance,’ not ‘procedure,’”); Braddock v. Zimmerman, 906 A.2d 776, 784 (Del. 2006) (“The demand requirement of Rule 23.1 is a substantive right . . . .” (quotation marks omitted)); Ainscow, 180 A. at 615 (“The question of whether a stockholder may act as a volunteer in taking up the cudgels in behalf of his corporation . . . is one of his right and authority to act.”). 29

2025Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950 , 952 9 suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.”20 Because derivative litigation encroaches on the managerial freedom of directors, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the direct

2021Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); 33 seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.” 93 Because derivative litigation impinges on the managerial freedom of directors in this way, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regard

2025In this case, therefore, the Zuckerberg analysis hinges on whether Plaintiff has stated a claim under Rule 12(b)(6) against the Demand Board members. “[T]he governing pleading standard in Delaware to survive a motion to dismiss is reasonable ‘conceivability.’”56 When considering such a motion, the court must 54 In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963 , 989–90 (Del.

2022In this case, therefore, the Zuckerberg analysis hinges on whether Plaintiff has adequately alleged its “Caremark claim.” A Caremark claim “seeks to hold directors accountable for the consequences of a corporate trauma.”85 To adequately allege such a claim, a plaintiff must allege that the 83 Id. 84 In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963 , 989–90 (Del.

2019First, by requiring exhaustion of intracorporate remedies, the demand requirement invokes a species of alternative dispute resolution procedure which might avoid litigation altogether.”); Spiegel, 571 A.2d at 773 (“The purpose of pre-suit demand is to assure that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation . . . .”); Aronson, 473 A.2d at 811–12 (“[T]he demand requirement of . . .

2007The case law is clear that the demand requirement exists at the threshold of derivative litigation and that, when confronted with a derivative action, a board of directors cannot stand neutral, but "must affirmatively object to or support the continuation of the [derivative] litigation.” Spiegel v. Buntrock, 571 A.2d 767, 775 (Del.1990) (citing Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 731 (Del.1988)).

2026Ch. 2015) (“I accept as true Plaintiff’s particularized allegations of fact and draw all reasonable inferences that logically flow from those allegations in Plaintiff’s favor.” (citing White v. Panic, 783 A.2d 543, 549 (Del.2001))). 80 that the plaintiff plead facts with particularity, but also requiring that this Court draw all reasonable inferences in the plaintiff’s favor.”277 The demand analysis is conducted as to the board in place at the time that the claims at issue were “validly in litigation.”278 This rule protects representative plaintiffs by preventing defendants from recomposing a

2021This Court has articulated two tests to determine whether the demand requirement should be excused as futile: the Aronson test and the Rales test.104 The Aronson test applies where the complaint challenges a decision made by the same board that would consider a litigation demand.105 Under Aronson, demand is excused as futile if the complaint alleges particularized facts that raise a reasonable doubt that “(1) the directors are disinterested and independent[,] [or] (2) the challenged 102 Brehm, 746 A.2d at 254 . 103 See, e.g., White v. Panic, 783 A.2d 543, 549 (Del. 2001). 104 Aronson, 473 A.2d

2025Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950 , 952 9 suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.”20 Because derivative litigation encroaches on the managerial freedom of directors, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the direct

2021Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); 33 seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.” 93 Because derivative litigation impinges on the managerial freedom of directors in this way, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regard

2016The Delaware Supreme Court construed the objection requirement more liberally than the demand requirement because “[t]he purpose of the objection [was] of lesser importance than the demand for payment.” Raab v. Villager Indus., Inc., 355 A.2d 888, 891 (Del.1976).

2015The Delaware Supreme Court construed the objection requirement more liberally than the demand requirement because ―[t]he purpose of the objection [was] of lesser importance than the demand for payment.‖ Raab, 355 A.2d at 891 .

2025Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950 , 952 9 suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.”20 Because derivative litigation encroaches on the managerial freedom of directors, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the direct

2021Stock Exch., Inc., 701 A.2d 70 , 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207 , 1217 n.15 (Del. 1996); 33 seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.” 93 Because derivative litigation impinges on the managerial freedom of directors in this way, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regard

2025The purpose of the demand requirement, where it applies, “is simply to settle whether there has been a conversion or not.” Mastellone v. Argo Oil Corp., 82 A.2d 379, 384 (Del. 1951).198 The demand rule does not apply “when the alleged wrongful act is of such a nature, as to amount, in itself, to a denial of the rights of the real owner[.]” Drug, 168 A. at 94 ; see also Malca, 2021 WL 2044268 , at *5; Wayman Fire Prot., Inc. v. Premium Fire & Sec., LLC, 2014 WL 897223 , at *23 (Del.

2025The purpose of the demand requirement, where it applies, “is simply to settle whether there has been a conversion or not.” Mastellone v. Argo Oil Corp., 82 A.2d 379, 384 (Del. 1951).198 The demand rule does not apply “when the alleged wrongful act is of such a nature, as to amount, in itself, to a denial of the rights of the real owner[.]” Drug, 168 A. at 94 ; see also Malca, 2021 WL 2044268 , at *5; Wayman Fire Prot., Inc. v. Premium Fire & Sec., LLC, 2014 WL 897223 , at *23 (Del.

2023LEGAL ANALYSIS “Stockholders cannot shortcut the board’s control over the corporation’s litigation decisions without first complying with Court of Chancery Rule 23.1.”11 Rule 23.1 is the “procedural embodiment” of the demand requirement.12 Under Rule 23.1, a derivative plaintiff must plead with factual “particularity” its efforts (or lack thereof) to satisfy the demand requirement.13 This standard is “stringent[.]”14 Under Rule 23.1, a derivative plaintiff is entitled only to “reasonable inferences” that “logically flow from [the] particularized facts alleged . . . . [I]nferences that are not

2020A director is interested if, in this instance, she would face a substantial likelihood of personal liability for the conduct alleged in the complaint.41 Second, if any directors were interested, the court considers whether any other directors were not 36 City of Birmingham Ret. and Relief Sys., 177 A.3d at 55 . 37 See Rales, 634 A.2d at 933-34 . 38 Id.

2021Litig., 964 A.2d 106, 120 (Del.

2019“Under Delaware law, 96 Citigroup, 964 A.2d at 120 . 97 Aronson, 473 A.2d at 811 . 98 Id. at 812 . 99 Kaplan, 540 A.2d at 730 . 100 Citigroup, 964 A.2d at 120 (quoting Am.

1993Levine v. Smith, Del.Supr., 591 A.2d 194, 207 (1991) (demand requirement is not a mere formality of litigation, but rather an important stricture of substantive law); Tandycrafts, Inc. v. Initio Partners, Del .Supr., 562 A.2d 1162, 1166 (1989) (demand requirement is a stricture of substantive law); Allison v. General Motors, 604 F.Supp. 1106, 1115 (D.Del.1985), (demand requirement is a rule of substantive right), aff'd, 782 F.2d 1026 (3d Cir.1985); Kamen v. Kemper Financial Services, Inc., — U.S. -, -, 111 S.Ct. 1711, 1716-17 , 114 L.Ed.2d 152, 164 (1991) (the demand doctrine is a matter of su

1990Allison on Behalf of G.M.C. v. General Motors Corp., 604 F.Supp. at 1119 n. 12. 17 . "[Stotland] thus treats the demand requirement as an aspect of the allocation of managerial powers within the corporation.

1993Levine v. Smith, Del.Supr., 591 A.2d 194, 207 (1991) (demand requirement is not a mere formality of litigation, but rather an important stricture of substantive law); Tandycrafts, Inc. v. Initio Partners, Del .Supr., 562 A.2d 1162, 1166 (1989) (demand requirement is a stricture of substantive law); Allison v. General Motors, 604 F.Supp. 1106, 1115 (D.Del.1985), (demand requirement is a rule of substantive right), aff'd, 782 F.2d 1026 (3d Cir.1985); Kamen v. Kemper Financial Services, Inc., — U.S. -, -, 111 S.Ct. 1711, 1716-17 , 114 L.Ed.2d 152, 164 (1991) (the demand doctrine is a matter of su

1991The demand requirement is not a “mere formalit[y] of litigation,” but rather an important “stricture[] of substantive law.” Tandycrafts v. Initio Partners, 562 A.2d at 1166 .

2026When Plaintiff filed this action, the Board comprised nine members: Sidransky, Cabilly, Spiegel, Goldberg, Orbach, Appel, Bisker-Leib, Martel, and Berlin, (together, the “Demand Board”).36 To show demand futility, Plaintiff must allege particularized facts creating a reason to doubt that five of the nine Demand Board members were capable of impartially considering a demand.37 33 Marchand v. Barnhill, 212 A.3d 805, 818 (Del. 2019). 34 Braddock v. Zimmerman, 906 A.2d 776, 785 (Del. 2006). 35 See Harris v. Carter, 582 A.2d 222, 231 (Del.

2026When Plaintiff filed this action, the Board comprised nine members: Sidransky, Cabilly, Spiegel, Goldberg, Orbach, Appel, Bisker-Leib, Martel, and Berlin, (together, the “Demand Board”).36 To show demand futility, Plaintiff must allege particularized facts creating a reason to doubt that five of the nine Demand Board members were capable of impartially considering a demand.37 33 Marchand v. Barnhill, 212 A.3d 805, 818 (Del. 2019). 34 Braddock v. Zimmerman, 906 A.2d 776, 785 (Del. 2006). 35 See Harris v. Carter, 582 A.2d 222, 231 (Del.

2025See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). 18 secured a material personal benefit from the challenged sales.48 Plaintiffs, however, did not make that argument; they therefore waived it.49 Where, as here, a plaintiff’s basis for arguing demand futility centers on a substantial likelihood of liability resulting from the derivative claims at issue, the demand analysis effectively folds into an analysis of the strength of the underlying claims as to the Demand Board members.