A recent Delaware Court of Chancery opinion provides practical instruction for corporate litigators regarding the difference between a direct v. derivative claim as well as an analysis of the requirements under Rule 23.1, and an application of the two-prong test in Aronson v. Lewis to satisfy the prerequisite of pre-suit demand futility.  Chester County Employees’ Retirement Fund v. New Residential Investment Corp., C.A. No. 11058-VCMR (Del. Ch. Oct. 7,2016). This case involves a challenge to a transaction among affiliated entities.

Key Legal Principles Addressed

The Court conducts an educational description of a direct and a derivative claim, as well as recognition that some claims are both direct and derivative.

The Court also reviewed the standard under Rule 23.1 which embodies the pre-suit demand requirement that must be satisfied for a derivative claim.  The Court reviewed the two-pronged test to demonstrate demand futility with particularized facts that allege a “reasonable doubt” that: (1) the directors are disinterested and independent; and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.  In addition to providing a definition for determining if a director is “disinterested” as well as “independent”, the Court discusses the second prong which involves the rare case in which a transaction can be shown to be “so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability exists.”

The Court reviewed the alleged conflicts based on relationships involving interlocking directorships, but found that the plaintiff did not allege sufficient facts to excuse demand. The Court also reviewed the requirements for ripeness and the need for an actual controversy before the Court would hear a declaratory judgment action pursuant to 10 Del. C. § 6501.