Shareholder Derivative Action Dismissed Because Plaintiff Failed To Make A Demand on the Board of Directors

IN RE HURON CONSULTING GROUP, INC. v. HURON CONSULTING GROUP, INC., Ill: Appellate Court, 1st Dist., 2nd Div. 2012 - Google Scholar:


This case arises under Delaware law.  Plaintiff, Brian Hacias, brought a derivative action purportedly on behalf of Huron Consulting against its directors.  Because the corporation was a Delaware corporation, Delaware law applies.


A derivative action is a lawsuit brought by a shareholder on behalf of the corporation against an alleged corporate wrongdoer.  The shareholder is attempting to stand in the shoes of the corporation.


Under Delaware law, the plaintiff shareholder who brings a derivative action must make a demand on the board of directors or allege what is known as demand futility.  In plain English, the plaintiff must tell the Board of Directors about the alleged wrongdoing and tell the Board to pursue it.


In some circumstances, demand is excused.  This usually occurs where the directors are not disinterested, such as where the directors are themselves the alleged wrongdoers.  Delaware law allows the plaintiff to allege that the directors could not be expected to sue themselves for wrongdoing.


Under the Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) standard, "demand will be excused if the derivative complaint pleads particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise a product of a valid exercise of business judgment."  The Aronson standard applies to specific decisions of the Board of Directors.


Where the Board of Directors did not make a decision regarding the issues in the lawsuit, another standard applies.  Under Delaware law, "demand is excused only where 'the particularized factual allegations create a reasonable doubt that, [at] the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.'" (quoting Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006).


Here the court found that the plaintiff had not adequately alleged demand futility under either test and dismissed the case.  In essence, plaintiff failed to allege that any one of the directors was "interested."  Instead, according to the court, plaintiff made conclusory allegations which were insufficient to state a claim.


The Appellate Court affirmed the dismissal of the Complaint.


Edward X. Clinton, Jr.

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