In re Kraft Heinz Demand Refused Derivative Stockholder Litig., Consol. C.A. No. 2022-0398-LWW (Del. Ch. July 19, 2024)
By making a demand, a stockholder-plaintiff tacitly concedes that the board can impartially consider the demand. With this issue conceded, the only issues to be examined are the good faith and reasonableness of the board’s investigation. In this case, the plaintiffs challenged a stock sale that they claimed was based on material information that was withheld from the public. The plaintiffs made a demand on the board, which formed a working group of two directors to examine the demand. The working group hired independent counsel and a forensic accountant. After a two-year process that included the review of 150,000 documents and 12 witness interviews and which also had the benefit of a detailed report from a prior investigation of this subject matter, the working group produced a 110-page report recommending that the demands be refused and the full board agreed. Plaintiffs argued that the demands were wrongfully refused because the working group was structurally flawed due to is mandate and membership. In particular, the plaintiffs objected to the fact that the board appointed the working group but retained authority for the ultimate decision regarding the demands. The Court rejected this argument, however, because the plaintiffs had tacitly conceded by making the demand that the board was impartial. The plaintiffs also argued that a member of the working group was not independent, but the Court found the plaintiffs did not make particularized allegations indicating a lack of independence or that the director faced a substantial likelihood of liability. Lastly, the Court rejected the plaintiffs’ arguments that the working group’s process and conclusions supported a reasonable inference that the working group acted in bad faith. The Court accordingly granted the defendants’ motion to dismiss.
