In our previous blog series on Texas Double-Derivative Shareholder Suit, we touched briefly on the concept of business judgment rule when we discussed a board of directors’ decision to pursue or forgo corporate causes of action in the context of closely held corporations. In another recent blog post on Tsui v. Chou, we discussed a recent New York appellate court’s decision that held that board decisions were not protected under the business judgment rule because there was no evidence that the board discussed or informed themselves as to those matters.
Wandel v. Dimon, another recent New York appellate court decision, deals with whether a pre-suit demand on the corporation’s board of directors can be excused and in what circumstances.[1] In that case, JPMorgan’s synthetic credit portfolio lost at least $6.2 billion in 2012 as a result of high-risk trading activities, despite public representations that they were engaged in low-risk hedging activities. Shareholders filed a derivative lawsuit on behalf of the corporation for breach of fiduciary duties, alleging that the losses were “the direct consequence of [the directors’] failure to properly implement appropriate internal controls, oversight and risk management.” The shareholders did not, however, serve a demand on the company’s board of directors prior to filing suit, claiming that a demand would have been futile because at least a majority of the board faced a substantial likelihood of liability and the board reached a self-serving conclusion of no breach without conducting a reasonable and good faith investigation into the misconduct.
Under the laws of Delaware, the state of incorporation of JPMorgan, pre-suit demand on the corporation is required, unless doing so would be futile. To show futility, the court said, the shareholders must show facts raising “a reasonable doubt that, [at] the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” In this case, the court found that the board consisted of 11 directors, but at most, the shareholders showed that 4 of them faced a substantial likelihood of liability in the litigation and, thus, not independent. This, in the court’s opinion, was not sufficient to excuse demand, because a majority of the directors were independent. Accordingly, the court dismissed the complaint for failure to show that pre-suit demand on the board of directors was excused.
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[1] See generally Wandel v. Dimon, 2016 N.Y. Slip Op. 00252 (1st Dep’t, Jan. 14, 2016). Unless otherwise noted, all references to the case are from this citation.