When is a Shareholder Demand Considered Futile in a Demand Futility Suit?

Question from Jane, When is a Shareholder Demand Considered Futile in a Demand Futility Suit?

Answer from AI:

In a shareholder derivative lawsuit, a shareholder is suing on behalf of the corporation, typically against the board of directors or corporate officers for alleged misconduct. Before filing such a lawsuit, the shareholder is generally required to make a demand on the corporation’s board of directors to rectify the alleged wrongs. However, in certain circumstances, this demand requirement can be excused if it is deemed futile.

Understanding Demand Futility

The concept of demand futility is rooted in the business judgment rule, which presumes 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.

Under the rules of the Federal Rule of Civil Procedure 23.1, a shareholder can bypass the demand requirement if they can adequately demonstrate to the court that such a demand would be futile.

When is Demand Considered Futile?

The determination of demand futility is highly fact-specific and depends on the circumstances of each case. However, courts generally consider a demand to be futile and excuse the requirement in situations where:

• The directors are alleged to have participated in the alleged wrongdoing or misconduct.
• The directors would face substantial personal liability if the action were successful.
• The directors are incapable of making an independent and disinterested decision regarding the litigation.

These are general guidelines, and the specific laws and standards can vary from state to state. For example, Delaware courts apply the Aronson test or the Rales test, depending on the circumstances, to determine whether a demand would be futile.

Consulting a Legal Professional

Determining demand futility can be complex and requires a thorough understanding of corporate law and the specific facts of the case. If you are a shareholder considering a derivative lawsuit, it is strongly recommended that you consult with a legal professional who can provide personalized advice based on your situation.

Please note that this information is a general overview and may not apply to all situations. Always consult with a legal professional for advice tailored to your circumstances.