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Young v. Sunrise Senior Living, Inc., C.A. No. 2770-VCL (Del. Ch. Apr. 25, 2008)

April 25, 2008

The Court of Chancery granted derivative plaintiff limited discovery to documents upon which defendants expressly relied in support of their motion to dismiss. Defendants responded to a derivative complaint with a motion to dismiss pursuant to Court of Chancery Rule 23.1. In defendants’ reply brief in support of their motion, defendants relied in part on a board committee’s favorable findings. The defendants contended that their repeated references to the committee’s findings were not offered for their truth but to show that plaintiff’s complaint drew unreasonable inferences from earlier public filings relating to the appointment of the special committee and its findings. The Court rejected defendants’ contention as inconsistent with any fair reading because (a) the previously cited excerpts clearly demonstrated that the defendants offered the special committee’s findings for their truth and (b) they were subject to reasonable dispute and therefore were not subject to judicial notice. In a footnote, the Court also expressed skepticism because (i) the committee was comprised of one recently-appointed director and then another newly-appointed director, (ii) the committee did not prepare a written report but only a public filing that did not disclose the committee’s composition or the absence of a written report, (iii) the corporation’s initial motion to dismiss on grounds that demand was not excused was not authorized by “any disinterested person or body,” and (iv) the defense briefs relied on the committee’s findings but did not mention its composition or absence of written report. The Court cited Fleischman v. Huang, a case involving similar facts, and held that when defendants rely in their dismissal briefs on committee findings that are outside the complaint, such reliance opens the matter to limited discovery regarding the findings and documents in support thereof or on which the findings were based. 2007 WL 2410386 (Del. Ch. Aug. 22, 2007). The Court explained that if a party presents documents in support of its Rule 12(b)(6) motion and the trial court considers the documents, the proceeding is converted to a Rule 56 motion for summary judgment. Before the Court considers a motion for summary judgment, the non-moving party should normally have some opportunity for discovery.

The full opinion is available here