January 11, 2013
On Wednesday, AIG refused a demand that it sue the federal government over unfair bailout terms. How is it possible that AIG might, with a straight face, consider such a suit? Didn’t they just thank us for our contribution? However shocking AIG’s participation in this suit might seem, AIG says it had no choice but to consider the demand from its former chief executive, Hank Greenberg. Is this true?
As many of you are no doubt aware, a derivative action is a suit brought by a shareholder on behalf of the company. In order for a shareholder to usurp this role reserved for corporate management, a shareholder must first demand the directors bring suit. Only after the board fails to take action may a shareholder bring a suit derivatively. See, Rule 23.1 of the Federal Rules. But, does AIG have an obligation to consider this action?
We tried this simple search on WestlawNext in Delaware:
liability for refusal to consider presuit demand
Our results address whether a plaintiff is excused from the demand requirement. But, our top case law results recite the basic principle that a board’s decision not to take action on a pre-suit demand is subject to the business judgment rule. Citing a key case, Zapata Corp (430 A.2d 779), the court in Aronson v. Lewis noted:
…where demand on a board has been made and refused, we apply the business judgment rule in reviewing the board’s refusal to act pursuant to a stockholder’s demand.
Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984) overruled by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)
AIG has been careful to point out that Delaware law requires them to make this consideration. It’s a difficult marketing challenge. Although the general public might hold a strong opinion on whether AIG might be “too big to fail,” few of us will confess a detailed familiarity with the intricacies of derivative actions and corporate governance.
ADDITIONAL RESEARCH REFERENCES:
By letter dated May 23, 2008, in compliance with Rule 23.1 of the Federal Rules of Civil Procedure, Plaintiff, through counsel, made demands on BOAC’s Board to, inter alia, pursue through litigation, the claims alleged in this action and name as Defendants those identified above, among others responsible for the wrongdoing as alleged herein (the “Demand Letter”). A copy of the Demand Letter is attached as Exhibit “A.” The Board apparently treated the Demand Letter as if it had no material significance since, as of the date of this Complaint, four months after it was sent, the Board has neither responded to the Demand Letter nor taken the actions demanded therein.1Accordingly, Plaintiff’s demands have been effectively rejected by the Board.P.E. LUCAS, Derivatively on Behalf of Bank of America Corporation, and its shareholders…, 2008 WL 5168452 (C.D.Cal.)
The Fletcher Cyclopedia (at 13 Fletcher Cyc. Corp. § 5969) cites Schick v. Amalgamated Clothing for the idea that a board of directors has no obligation to take any specific type of action to respond to the demand:
The “demand” contemplated by Rule 23.1 is really a form of notice designed to afford to the corporation’s board an opportunity to consider the facts asserted and to exercise its business judgment whether to press any arguable claim the corporation may possess or to take other action. Zapata Corporation v. Maldonado,Del.Supr., 430 A.2d 779 (1981). The board has no obligation to take any specific type of action to comply with a demand under Rule 23.1. The board may, for example, ignore the demand, or it may take other action it deems appropriate if, in the exercise of its good faith judgment the circumstances indicate that the corporation’s interests would be served thereby. But, because a Rule 23.1 demand serves a notice function, it makes little difference with respect to the board’s duty, upon receiving information of the kind contained in the Union’s letter, whether the information comes from a stockholder or from another and thus it makes little sense to think in terms of “entitlement to make a demand.”Schick Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235, 1240 (Del. Ch. 1987)