SPEIGEL v. BUNTROCK
571 A.2d 767 (Del. Supr. 1990)
This is an appeal from an order of the Court of Chancery dismissing a derivative action filed by the plaintiff-appellant, Ted Spiegel ("Spiegel"), a shareholder of Waste Management, Inc. ("Waste Management"). In his complaint, Spiegel alleged that Dean L. Buntrock ("Buntrock"), Chairman of the Board of Directors and Chief Executive Officer of Waste Management; Jerry E. Dempsey ("Dempsey"), Vice Chairman; Peter H. Huizenga ("Huizenga"), Vice President and Secretary; and James E. Koenig ("Koenig"), Staff Vice President (collectively "management defendants"), improperly acquired stock in ChemLawn Corporation ("ChemLawn"), based upon inside information, during the two years immediately preceding Waste Management's tender offer for ChemLawn. Spiegel sought to compel the management defendants to account to Waste Management for the personal profits they made upon the sale of their ChemLawn stock.
[Following a demand by Spiegel that the corporation take action, the Waste Management board of directors
established a special committee of outside directors to investigate the matter. The committee concluded that it was not in the company's best interests to pursue the derivative action.]
A basic principle of the General Corportion Law of the State of Delaware is that directors, rather than
shareholders, manage the business and affairs of the corporation. "The exercise of this managerial power is
tempered by fundamental fiduciary obligations owed by the directors to the corporation and its shareholders." Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 729. The decision to bring a lawsuit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation. Consequently, such decisions are part of the responsibility of the board of directors.
Nevertheless, a shareholder may file a derivative action to redress an alleged harm to the corporation. The nature of the derivative action is twofold.
First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.
In essence, it is a challenge to a board of directors' managerial power. Thus, by its very nature, "the derivative action impinges on the managerial freedom of directors." In fact, the United States Supreme Court has noted that the shareholder derivative action "could, if unrestrained, undermine the basic principle of corporate governance that the decisions of a corporationincluding the decision to initiate litigation-should be made by the board.of directors or the majority of shareholders." Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 531
"Because the shareholders' ability to institute an action on behalf of the corporation inherently impinges upon the directors' power to manage the affairs of the corporation the law imposes certain prerequisites on a stockholder's right to sue derivatively." Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730. Chancery Court Rule 23.1 requires that shareholders seeking to assert a claim on behalf of the corporation must first
exhaust intracorporate remedies by making a demand on the directors to obtain the action desired, or to plead with particularity why demand is excused.
The purpose of the pre-suit demand is to assure that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation, to decide whether to invest the resources of the corporation in litigation, and to control any litigation which does occur. "[Bly promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations." Aronson v. Lewis, 473 A.2d at 812.
Since a conscious decision by a board of directors to refrain from acting may be a valid exercise of business judgment, "where demand on a board had been made and refused, [courts] apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand" to file a lawsuit. Id. at 813. The business judgment rule is a presumption that in making a business decision, not involving self-interest, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. "The burden is on the party challenging the decision to establish facts rebutting th[is] presumption." Aronson v. Lewis, 473 A.2d at 812. Thus, the business judgment rule operates as a judicial acknowledgement of a board of directors' managerial perogatives.
In this case, the Court of Chancery found there was no material dispute that the Board, through its Committee, had "function[ed] effectively . . . in a way that fully satisfies the prerequisites for the application of the business judgment rule." Consequently, the Court of Chancery concluded that, in accordance with the business judgment expressed by the Board, through its Committee, Spiegel's derivative action had to be dismissed. We agree.