Demand Futility Precludes Dismissal for Failure to Make Demand on Board of Managers

In an Opinion, dated August 25, 2022, in Uniloeb Holdings LLC v. Shamus, Justice Andrew Borrok largely denied Defendants’ motion to dismiss. In particular, with respect to defendants’ claim that the action should be dismissed due to plaintiff’s failure to make a demand on the Board of Managers, the Court explained:

The argument fails. Under Delaware law, demand is excused where it is futile (United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v Zuckerberg, 262 A3d 1034, 1058 [Del 2021]). The premise being demand must be excused where the Board is not independent either by virtue of its financial interest, or because it is controlled by an interested party or because it would otherwise be called upon to sue itself. In analyzing whether demand is futile, courts consider the following factors on a director-by-director basis to determine: (i) whether the director received a material personal benefit from the alleged misconduct, (ii) whether the director would face a substantial likelihood of liability on any of the claims, and (iii) whether the director lacks independence from someone who received a material personal benefit or would face a substantial likelihood of liability (id.). As discussed above, the Individual Defendants control the Board of Managers and are alleged to have engaged in wrongdoing. As such, demand must be excused.

The attorneys at Schlam Stone & Dolan frequently litigate disputes concerning board members. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.