In this decision, the Court of Chancery found that stockholders challenging a controlling stockholder’s equity compensation grant failed to plead demand futility. Accordingly, the Court granted the defendants’ motions to dismiss.
The Court explained that under Rule 23.1, the plaintiffs must plead with particularity facts from which the Court may infer that most of the members of the board of directors received a material benefit, lacked independence from the controller, or faced a substantial likelihood of liability relating to the challenged conduct. At the time the complaint was field, the board consisted of eight directors. Two directors were not independent, but the parties contested the ability of the remaining six directors to consider a demand. The Court carefully considered each director and found that there was a reason to doubt only one director’s independence, because he had a longstanding relationship with the controller, derived his principal income from his compensation as the officer of the Company, and did not qualify as an independent director under the NASDAQ listing requirements. Even though another director, for instance, was one of the co-founders and served on the board for 12 years, those allegations, without more, did not suffice to rebut the presumption of independence. Additionally, the Court found that the director defendants did not face a substantial likelihood of liability from the litigation, and no facts were presented supporting the directors acted in bad faith. Therefore, the plaintiffs failed to plead particularized facts giving rise to a reasonable inference that the demand was futile.
