Wood v. Baum, No. 621, 2007 (Del. July 1, 2008)
In this opinion, the Delaware Supreme Court reviewed de novo the Chancery Court’s decision
dismissing plaintiff’s derivative complaint for failure to allege particularized facts sufficient to establish that demand would have been futile in compliance with Crt. Ch. R. 23.1.
The amended complaint alleged that the board of directors of Municipal Mortgage & Equity, LLC
(“MME”) breached their fiduciary duties by causing MME to engage in certain activities, and breached their Caremark duties by failing to institute and maintain adequate accounting and reporting practices, resulting in damage to the company. In response to the defendants’ motion to dismiss for failure to make a pre-suit demand on MME’s board, the plaintiff argued that demand was futile because the Board was disabled because they faced a substantial risk of personal liability. Because MME’s Operating Agreement exempted the Board from liability for everything except fraudulent or illegal conduct, the plaintiff was required to allege particularized facts showing that the defendants had engaged in fraud, that they knowingly engaged in illegal activity, or that they breached in bad faith the implied covenant of good faith and fair dealing. Affirming the Chancery Court’s opinion, the Delaware Supreme Court found that the complaint did not meet this burden because it did not state an actionable claim for fraud, it did not plead with particularity either that the directors engaged in any specific conduct that they knew was illegal, or that they ignored cognizable “red flags,” and it failed to allege any basis for a bad faith violation of the implied contractual covenant of good faith and fair dealing. In doing so, the Court noted that neither the mere execution of allegedly faulty securities law filings nor the mere fact that certain directors served on the Audit Committee was sufficient to satisfy the applicable pleading standard.