Enables a shareholder to bring suit on behalf of the corporation for harm done to the corporation

• Recovery, if any, must go to the corporation
• Threshold issue is whether claim is derivative
  as opposed to a direct action for shareholder injuries
• Delaware Supreme Court recently revised the standard for determining whether a claim is derivative or direct (Tooley)

Must comply with Court of Chancery Rule 23.1

• Shareholder must retain ownership of the shares
  throughout the litigation
• Shareholder must make presuit demand on the board
• Court must approve any settlement

Rule 23.1. Derivative actions by shareholders

• In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly
  be asserted by it, the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff's share or membership thereafter devolved on
  the plaintiff by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff's failure to obtain the action or for not making the
  effort. The action shall not be dismissed or compromised without the approval of the Court, and notice by mail, publication or otherwise of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the Court directs; except that if the dismissal is to be without prejudice or with prejudice to the plaintiff only, then such dismissal shall be ordered without notice thereof if there is a showing that no compensation
  in any form has passed directly or indirectly from any of the defendants to the plaintiff or plaintiff's attorney and that no promise to give any such compensation has been made.

• Source document

DGCL § 327

Tooley v DLJ (Del 2004)

• Upheld Chancery's dismissal of stockholder claim
  that 22-day delay in merger closing was a
  breach of fiduciary duty, but on different grounds
• Revised standard for whether a stockholder claim is derivative or direct
• Turns solely on the following questions

• Who suffered the alleged harm
  ◊ Corporation or
  ◊ Suing stockholders, individually and
• Who would receive the benefit of any recovery or other remedy the corporation or the stockholders, individually

• Ends use of special injury concept
• Facts
• Chancery's decision
• Distinguishing between direct and derivative actions
• History of Delaware jurisprudence
• Standard applied
• Conclusion

Gentile v Rossette (Del Ch 2005)

In Re JP Morgan Chase (Del Ch 2005)

In re Syncor International (Del Ch 2004)

Dieterich v Harrer (Del Ch 2004)

Acker v Transurgical (Del Ch 2004)

Confin International v AT&T (Del Ch 2004)

Demand futility provides an exception to Rule 23.1 requirement that demand first be made on board

Case discussions

• Aronson v Lewis (Del 1984)
• In re JP Morgan Chase 2005

Aronson test

• Must plead with particularity facts that establish that demand would be futile because the directors are not independent or disinterested (1st prong), or
• Must plead with particularity facts that raise doubt about the challenged transaction being entitled to the protection of the business judgment rule (2nd prong)

Aronson v Lewis (Del 1984)

• Demand futility discussed

Ishimaru v Fung (Del Ch 2005)

Beam v Stewart (Del 2004)

Jacobs v Yang (Del Ch 2004)

In Re JP Morgan Chase (Del Ch 4.29.05)

Rattner v Bidzos (Verisign) (Del Ch 2003)

Rule 23.1 requires shareholder to retain ownership
of the shares throughout the litigation

• Can't be met if company is merged or goes bankrupt

Lewis v Ward [Cyprus Amax] (Del 2004)

Dieterich v Harrer (Del Ch 2004)

Agostino v Hicks (Del Ch) 3.11.04

In re New Valley (Del Ch) 6.28.04

Suits Against Corporations

Delaware General Corporation Law