Protas v. Cavanagh, C.A. No. 6555-VCG (Del. Ch. May 4, 20120).
Whether the plaintiff satisfied the pre-suit demand requirements in her derivative claims against the trustees of the trust.
No, and therefore her complaint was dismissed.
This case involved claims by a common stockholder of a Delaware statutory trust against the trustees of that trust, as well as claims against those entities that she alleges aided and abetted the breach. The Court determined that the claims were derivative and in order to survive a motion to dismiss under Section 3816 of the Delaware Statutory Trust Act (“DSTA”), the Court explained that a plaintiff must plead particularized facts raising a reasonable doubt that the actions of the trustees were taken honestly and in good faith. Because the Court determined that that standard was not met, the complaint was dismissed.
The Court conducted the same analysis to determine whether a claim is direct or derivative as would be done in a case involving a corporation. Thus, the Court compared Court of Chancery Rule 23.1(a) with Section 3816(c) of Title 12 of the Delaware Code, which is the counterpart in the DSTA to the pre-suit demand requirement in Rule 23.1. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), in which the Delaware Supreme Court articulated the test for assessing whether a claim asserts a direct or derivative harm.
The Court explained that the standard used to determine demand futility when a plaintiff sues on behalf of a statutory trust are the same as those applied to derivative suits by corporate stockholders. Where a plaintiff challenges a conscious business decision by the board, the Aronson test applies. In order to survive a motion to dismiss, the plaintiff must successfully plead demand futility by alleging particularized facts that raise a reasonable doubt that: (1) “The directors are disinterested and independent [or] (2) The challenged transaction was otherwise the product of a valid exercise of business judgment.” See footnotes 76 through 80. The plaintiff in this case sought to rely on the second prong of Aronson which, as the Court explained, is a “heavy burden.”
As applied to the facts of this case, in order to succeed, the plaintiff in this case was required to plead facts amounting to corporate waste. As regular readers are aware, the valid waste claim must establish that: “A transfer of corporate assets that serves no corporate purpose or for which no consideration at all is received,” has taken place.
The Court provided citations to authority to explain how difficult it was to succeed on such a claim and, predictably perhaps, the Court held that the allegations in this case fell short.
The Court referred to a decision by former Chancellor Chandler in which he quipped that a waste claim in the context of the second prong of Aronson may be akin to a search for the Loch Ness monster, and: “like the cameras of many a tourist in Scotland, the allegations of the plaintiff here are not sufficiently focused to bring the fabled beast within our ken.” See footnotes 95 and 96. Footnote 100 refers to a case that underscores the point by explaining that it is not sufficient that a plaintiff regards a decision as “unwise, foolish or even stupid” because those descriptions are not legally significant nor are they legally sufficient to successfully plead a waste claim.