Last year, the Delaware Supreme Court adopted a tripartite test for assessing demand futility allegations in derivative actions. United Food & Commercial Workers Union v. Zuckerberg 262 A.3d 1034 (Del. 2021). Under this test, courts are to determine (on a director-by-director basis) whether the director:

  • received a material personal benefit from the alleged misconduct that is the subject of the litigation;
  • faces a substantial likelihood of liability on any of the claims; or
  • lacks independence from someone who received a material personal benefit from the alleged misconduct . . . who would face a substantial likelihood of liability on any of the claims.

Id. at p. 1059. If the answer to any of the questions is "yes" for at least half of the members of the demand board, then demand is excused as futile." (Ibid.) This new test supersedes the tests for demand futility adopted by the Delaware Supreme Court in Aronson v. Lewis, 473 A.2d 805 (Del. 1984) and Rales v. Blasband, 634 A.2d 927 (Del. 1991).

California courts have applied both Aronson (Bader v. Anderson, 179 Cal. App. 4th 775 (2009)) and Rales (Leyte-Vidal v. Semel, 220 Cal. App. 4th 1001 (2013)). Recently, a California Court of Appeal became the first court outside of Delaware to apply Zuckerberg. Tola v. Bryant, 76 Cal. App. 5th 746, 291 Cal. Rptr. 3d 728 (2022). The case, however, involved a derivative action initiated by a shareholder of Intel Corporation, Delaware corporation. Therefore, it is no surprise that the Court of Appeal analyzed the allegations of demand futility under Delaware law.

I am a bit surprised that the parties agreed that Delaware law applied to the action. Section 800 of the California Corporations Code governing shareholder derivative actions expressly applies to foreign corporations (as defined in Section 171). As I have noted, Section 800 includes a specific pleading requirement not found in Delaware law. See Plaintiffs File Amended Complaint Against Yahoo! But Is Something Missing? Furthermore, Section 800 permits the corporation or a defendant to move the court to order that the plaintiff post a bond.

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