Delaware Court Of Chancery Applies “Universal Test” To Dismiss Derivative Suit For Failure To Make A Demand
M&A and Corporate Governance Litigation
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  • Delaware Court Of Chancery Applies “Universal Test” To Dismiss Derivative Suit For Failure To Make A Demand

    On January 21, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of GrafTech International Ltd. (the “Company”) against the Company’s directors and the Company’s controlling stockholder, Brookfield Asset Management (“Brookfield”), in connection with the Company’s repurchase of shares from Brookfield.  Simons v. Brookfield Asset Mgmt., C.A. No. 2020-0841-KSJM (Del. Ch. Jan. 21, 2022).  The Court held that the demand was not excused because five of the nine board members were capable of impartially considering a litigation demand under the recently affirmed Zuckerberg “universal test.”  United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862 (Del. Ch. 2020).

    Following the December 2019 share repurchase, Plaintiff made a Section 220 demand for books and records.  The Company responded by producing documents in April and May 2020.  Then, in August 2020, the Company increased the number of directors from eight to nine and added an independent director to the board.  Plaintiff filed suit in September 2020, asserting both direct and derivative claims.  Plaintiff made a two-part argument as to why demand was excused for his derivative claims.  He first asserted that the directors added a ninth board member in order to preempt a demand futility argument and in violation of a stockholder agreement.  The Chancellor rejected this theory, concluding that the addition of the director was acceptable under the Company’s bylaws and did not violate the agreement.  The Court also concluded that the assertion was not reasonably conceivable, given that some seven months had passed between the 220 demand and the appointment of the additional director.

    Plaintiff then asserted that the outside directors on the Company board were incapable of disinterestedly and independently considering a demand.  Applying the recently affirmed Zuckerberg “universal test,” Chancellor McCormick considered whether the directors (i) received a material personal benefit from the alleged misconduct; (ii) faced a substantial likelihood of liability on any of the claims; or (iii) lacked independence from someone who received a material personal benefit or faced substantial likelihood of liability from the alleged misconduct.  As to the first factor, Chancellor McCormick concluded that neither a past business relationship nor reasonable remuneration for serving as a director destroyed independence.  The Chancellor also found that Plaintiff’s quibbles with the decisions of the committee that approved the share repurchase did articulate the type of bad-faith conduct that would be necessary to expose the directors to personal liability.