FLI Deep Marine LLC, et al. v. McKim, et al., C.A. No. 4138-VCN (Del. Ch. Apr. 21, 2009) (V.C. Noble)
In this case, the Court dismissed derivative claims brought against Deep Marine Holdings, Inc., as well as its wholly owned subsidiary, Deep Marine Technology, Inc. (collectively, “DMT”). Two minority shareholders of DMT brought a stockholder derivative action against both individual and controlling shareholder defendants, alleging (i) that the controlling shareholder defendants “exploited and looted [DMT] for personal economic gain,” and (ii) that the individual defendants ignored “corporate formalities and reasonable business practices,” and also breached their fiduciary duties through inadequate supervision.
The plaintiffs made demand on the Board on October 10, 2008, and the Board formed a special committee to investigate the demand allegations. Three weeks later, before the special committee had completed its investigation and before the Board took any action concerning the demand, the plaintiffs brought the derivative action, alleging that demand was futile and should be excused. The special committee moved to dismiss or stay the derivative complaint. The other defendants joined in that motion.
Citing “settled law” that “could hardly be clearer,” the Court held that “where a shareholder . . . chooses to make a demand upon a board of directors, she concedes the independence of a majority of the board.” Accordingly, the plaintiffs were “precluded from now arguing that demand should be excused because the directors are conflicted.” Having made a demand on the board, a shareholder “must allow the board a reasonable time to investigate and respond to the claim prior to filing suit.” The Court therefore dismissed the claim without prejudice, rather than staying the action and retaining jurisdiction during the pendency of the special committee investigation.