The Court provides a useful recitation of standards that are of widespread applicability to those who make their living engaged in corporate litigation. For example, the court explained the following well-settled principles:
- By making a pre-suit demand, a plaintiff concedes that the board is disinterested and independent for purposes of responding to the demand. (This imposes at the outset quite a barrier to overcome in the likely event that, as here, the board refuses the demand.)
- Thus, the board’s decision is subject to the business judgment rule, and the only issue for the court to address in this context in order to analyze whether the board’s refusal was proper is: “the good faith and reasonableness of its [the board’s] investigation.” See footnote 21.
What I have never quite understood about this issue is the odd way the courts phrase the relevant standard:
[T]o survive a motion to dismiss under Rule 23.1 where demand has been made and refused, a plaintiff must allege particularized facts that raise a reasonable doubt that (1) the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty. Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.
This is parallel to the standard for demand excusal, of course, which provides that:
[T]he Court of Chancery in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Aronson v. Lewis, 473 A.2d 805, 814 (Del.1984).
I share Judge Frank Easterbrook's skepticism about the "reasonable doubt" language:
The reference to “reasonable doubt” summons up the standard applied in criminal law. It is a demanding standard, meaning at least a 90% likelihood that the defendant is guilty. If “reasonable doubt” in the Aronson formula means the same thing as “reasonable doubt” in criminal law, then demand is excused whenever there is a 10% chance that the original transaction is not protected by the business judgment rule. Why should demand be excused on such a slight showing? Surely not because courts want shareholders to file suit whenever there is an 11% likelihood that the business judgment rule will not protect a transaction. Aronson did not say, and later cases have not supplied the deficit. If “reasonable doubt” in corporate law means something different from “reasonable doubt” in criminal law, however, what is the difference?, and why use the same term for two different things? Starrels v. First Nat’l Bank of Chicago, 870 F.2d 1168, 1175 (7th Cir.1989) (Easterbrook, J., concurring) (citations omitted).
The Delaware Supreme Court eventually provided some guidance by suggesting that “the concept of reasonable doubt is akin to the concept that the stockholder has a ‘reasonable belief’ that the board lacks independence or that the transaction was not protected by the business judgment rule.” Grimes v. Donald, 673 A.2d 1207, 1217 (Del.1996).
But why not just ditch the phrase all together?