Justin M. Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.

This Court of Chancery decision provides useful guidance on the prerequisites for filing derivative claims and satisfying Rule 23.1. Kops v. Hassell, et al., C.A. No. 11982-VCG (Del. Ch. Nov. 30, 2016).

Background: Kops brought a derivative suit on behalf of the Bank of New York Mellon Corporation (“BNYM” or the “Company”) to recover from current and former directors and employees for losses that resulted from BNYM’s foreign exchange practices that caused liabilities of nearly $1 billion. Kops made her litigation demand on May 24, 2012. The board followed the special committee’s recommendation and rejected that demand on June 21, 2012. Kops ultimately filed her complaint in February 2016. In that complaint, she alleged: (1) an October 2011 New York Times advertisement by BNYM constituted a wrongful refusal; (2) the special committee was not reasonably informed to make the recommendation to refuse; (3) the special committee relied on prior investigations in forming its recommendation; and (4) the Company improperly failed to revisit the investigation once the demand was refused.

Analysis: The court began its analysis by reciting the presumption that boards of directors are afforded the protection of the business judgment rule for their decisions–unless a plaintiff can allege particularized facts that raise a reasonable doubt as to the board’s independence. Furthermore, the court noted that to show that a demand was improperly refused due to the board acting in an uninformed way by failing to investigate or inadequately investigating, particularized facts of such gross negligence are required.

Court’s Holding: The court first rejected Kop’s claim that an October 2011 New York Times advertisement by BNYM constituted a wrongful refusal and that the special committee was not reasonably informed to make the recommendation to refuse, because Kop still made a demand in May 2012. The court noted that this move by Kop implicitly conceded that the directors were able to use their business judgment at the time the demand was made.

Second, the court also rejected Kop’s assertion that the special committee relied on prior investigations in forming its recommendation and that the Company improperly failed to revisit the investigation once the demand was refused. In a similar demand case captioned Murray Zucker v. Gerald Hassell, et al., which was issued on the same day as Kop, the court found that Zucker also failed to support an inference that the special committee investigated his demand with gross negligence. The court referred interested readers to the Zucker opinion and stated: “The pleadings in this Complaint, and this Plaintiff’s characterization of her pleadings in briefing and at oral argument, do not add to that analysis such that I need to revisit the argument.”