recent developments in delaware corporate law - Greenberg Traurig ...

190 Delaware Law Review Volume 7:2
controlling shareholder are, without more, insufficient to rebut the presumption of the
directors’ independence.
On appeal, the Supreme Court focused only on the demand futility issue. Applying
the two-prong demand futility test of Aronson v. Lewis, 56 the Supreme Court reviewed de
novo the Court of Chancery’s dismissal of the derivative suit for failure to adequately plead
demand futility. 57 The Supreme Court observed that directors are presumed to have been
faithful to their fiduciary duties and that the burden is on shareholder derivative plaintiffs
to overcome that presumption by alleging particularized facts in their complaints creating
a reasonable doubt of a director’s independence. 58 The Supreme Court defined the specific
issue on appeal as “the quantum of doubt about a director’s independence that is ‘reasonable’
in order to excuse a presuit demand.” 59
The Supreme Court emphasized that independence is a fact-specific, contextual
inquiry. To show a lack of independence, the stockholder-plaintiff must create a reasonable
doubt that a director is “so ‘beholden’ to an interested director (in this case Stewart) that
his or her ‘discretion would be sterilized.’” 60 Applying these standards, the Supreme Court
determined that “[a]llegations that Stewart and the other directors moved in the same
social circles, attended the same weddings, developed business relationships before joining
the board, and described each other as ‘friends,’ even when coupled with Stewart’s 94%
56. 473 A.2d 805 (Del. 1984).
57. Id. at 1048. See Aronson, 473 A.2d at 814 (establishing that in determining demand
futility a court must analyze whether “(1) the directors are disinterested and independent and (2) the
challenged transaction was otherwise the product of a valid exercise of business judgment”).
58. The Supreme Court stressed that shareholders could meet that burden by exhausting
all reasonably available means, including their inspection rights under Section 220 of the Delaware
General Corporation Law. Martha Stewart, 845 A.2d at 1056-57. Had Beam inspected MSO’s books
and records, the court noted, she might have uncovered, for example, (i) “irregularities or ‘cronyism’
in MSO’s process of nominating board members”; (ii) “whether the board used a nominating
committee to select directors and maintained a separation between the director-selection process
and management”; (iii) “whether Stewart unduly controlled the nominating process or whether the
process incorporated procedural safeguards to ensure a director’s independence”; or (iv) whether
board meeting minutes revealed “how the directors handled Stewart’s proposals or conduct in various
contexts.” Id. at 1056. If such facts existed, they could have helped Beam overcome the independence
presumption.
59. Id. at 1048.
60. Id. at 1050.