Halpert Enterprises, Inc. v. Harrison, 2007 WL 486561 at *5 (S.D.N.Y., Feb. 14, 2007) aff'd. 2008 WL 4585466 (2d Cir., Oct. 15, 2008) ; Levine v. Smith, 591 A.2d 194, 213 (Del.1991) (overruled on other grounds). Thus, when a board refuses a demand, courts will examine the “good faith and reasonableness of its investigation.”
Aronson v. Lewis, Del. Supr., 473 A.2d 805, 814 (1984) (emphasis added). This language in Aronson was followed, sequentially, by: Pogostin v. Rice, Del. Supr., 480 A.2d 619, 624-25 (1984); Grobow v. Perot, Del. Supr., 539 A.2d 180, 186 (1988); Levine v. Smith, Del. Supr., 591 A.2d 194, 207 (1991); Heineman v. Datapoint Corp., Del. Supr., 611 A.2d 950, 952 (1992); Grimes v. Donald, Del. Supr., 673 A.2d 1207, 1217 n. 15 (1996); and Scattered Corp. v. Chicago Stock Exch., Del. Supr., 701 A.2d 70, 72-73 (1997). By implication, therefore, these dicta would suggest that our review is deferential, limited to a determination of whether the Court of Chancery abused its discretion.
However, we are guided by the recognition of the Delaware courts that "[a] shareholder derivative suit is a uniquely equitable remedy. . . ." Levine v. Smith, 591 A.2d 194, 200 (Del. 1991). Thus, the Delaware courts have consistently refused to apply its corporate law rigidly where to do so would be inequitable.
This may be satisfied by allegations demonstrating that either plaintiff is excused from making a demand that would be futile or that she made demand and the board wrongfully refused her demand to take action. See, e.g., Levine v. Smith, 591 A.2d 194, 212 (Del.1991), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000). “A shareholder's failure to sufficiently plead compliance with the demand requirement deprives the shareholder of standing and justifies dismissal of the complaint.”
In such a suit, a stockholder asserts a cause of action belonging to the corporation. Aronson, 473 A.2d at 811; Levine v. Smith, Del.Supr., 591 A.2d 194, 200 (1991). In a double derivative suit, such as the present case, a stockholder of a parent corporation seeks recovery for a cause of action belonging to a subsidiary corporation.
Alternatively, a shareholder may plead that demand is excused because futile. See Levine v. Smith, 591 A.2d 194, 200 (Del. 1991). The demand requirement "insure[s] that a stockholder exhausts his intracorporate remedies, and . . . provide[s] a safeguard against strike suits."
If a demand is made and rejected, the board rejecting the demand is entitled to the presumption of the business judgment rule unless the stockholder can allege facts with particularity creating a reasonable doubt that the board is not entitled to the benefit of the presumption. See Grimes, 673 A.2d at 1220; see also Levine v. Smith, 591 A.2d 194, 212 (Del. 1991), overruled on other grounds by Brehm, 746 A.2d 244, (the board's refusal of the demand to pursue the action is subject to judicial review according to the traditional business judgment rule).
Under Delaware law, different pleading requirements apply depending on whether a shareholder (1) makes a demand on a corporation before bringing suit and the corporation refuses the demand (“demand refused” cases) or (2) does not make a demand before bringing suit, claiming that the demand would be futile (“demand excused” or “demand futile” cases) ( see Levine v. Smith, 591 A.2d 194, 197, 212 (Del.1991), revd. in part on other grounds by Brehm v. Eisner, 746 A.2d 244, 253 [Del.Supr.2000] ). With respect to the merits, the court found that the amended complaint failed to allege particularized facts creating a reasonable doubt about the Board's reasonableness and good faith in investigating plaintiff's demand.
"A shareholder derivative suit is a uniquely equitable remedy in which a shareholder asserts on behalf of a corporation a claim belonging not to the shareholder, but to the corporation." Levine v. Smith, 591 A.2d 194, 200 (Del. 1991), overruled in part on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). "Derivative suits have been used most frequently as a means of redressing harm to a corporation allegedly resulting from misconduct by its directors."
Sterling v. Mulholland, 1998 U.S. Dist. LEXIS 19550, *4 (S.D.N.Y. 1998), citing Kaplan v. Peat, Marwick, Mitchell Co., 540 A.2d 726, 727-8 (Del. 1988). If demand is refused, the derivative suit can only be brought if the shareholder shows that the board's refusal was "wrongful." Levine v. Smith, 591 A.2d 194, 211 (Del. 1991). The board's refusal of a demand is reviewed under the business judgment rule, which creates a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."