Delaware Business Litigation Report

Chancery Holds Plaintiffs Adequately Pled Wrongful Refusal Where Board Did Not Correct Unauthorized Charter Amendments

Drachman v. Cukier, C.A. No. 2019-0728-LWW (Del. Ch. Oct. 29, 2021)
To survive a motion to dismiss in the demand refusal context, the plaintiff must allege facts that create a reasonable doubt that the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis or that the board acted in good faith, consistent with its duty of loyalty. Where the board’s response and other circumstances give rise to a reasonable inference that directors did not care about a clear, continuing violation of law, the standard for wrongful refusal may be met. 

In this case, at the company’s annual stockholder meeting, charter amendments to declassify the board of directors and to change the voting standard for uncontested director elections from a plurality to a majority of the votes cast both failed to garner the required majority vote. Despite that, the board deemed the two proposals approved and filed the amendments with the Delaware Secretary of State. When the plaintiffs made a pre-suit demand challenging this, the board replied by stating, contrary to the law and the company’s own disclosures about the required vote, that the amendments had been properly approved. The company did not take corrective action until a year after the plaintiffs filed suit, when the company obtained the requisite majority vote to approve the amendments. The plaintiffs then amended their complaint to allege that the directors breached their fiduciary duties in implementing the amendments and refusing to take corrective actions in response to the demand.

The Court reasoned that, while it was possible that the “board acted in good faith and was simply misinformed,” whatever advice the directors had received was outside the pleadings. At the pleadings stage, it was reasonable to infer that the board “just did not care about complying with the legal requirements of Delaware law.” As such, the Court held that the plaintiffs’ amended complaint raised a reasonable doubt that the board acted in good faith when refusing the demand and not taking corrective measures.

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