A New Test on Shareholder Derivative Claims: Delaware Supreme Court opinions in the Zuckerberg
BY: Eugena Liu, RBFL Editor
On September 23, 2021, in the United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, the Delaware Supreme Court adopted a new three-part test as a universal test in determining demand futility. The Zuckerberg test combined the Aronson and Rales, two governing demand futility tests in Delaware law for the past decades.
When Shareholders bring a derivative action on behalf of the corporation, shareholders must either make a demand on the board to request the board consider pursuing litigation or plead with particularized facts that the demand excused as futile. Before the Zuckerberg, Aronson and Rales are used to determine whether demand is excused as futile. The Delaware law has evolved to recognize Aronson as a “special application” or “narrower and circumstance-specific sister test” of Rales. The Aronson test applied when shareholders made a conscious business decision that would decide the litigation demand. The Rales test applied to all other circumstances.
The Zuckerberg’s universal test is a response to the wide adoptions of director exculpation provision under DGCL §102(b)(7). Before the enactment of DGCL §102(b)(7), directors face substantial risk of liability if their decisions are not justified by business judgement rule. But after a company has DGCL §102(b)(7) provision in its charter, its directors face no substantial risk of liability in cases where there was reasonable doubt that the requirements of the business judgment rule would be satisfied. Since the Aronson and Rales test were adopted prior to the enactment of DGCL §102(b)(7), its prongs employed the business judgment rule standard are no longer the appropriate measurement in determining whether directors made impartial business judgment on a litigation demand.
In the Zuckerberg test, courts ask the following three questions on a director-by-director basis when evaluating allegations of demand futility: “(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand; (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.” “If the answer to any of the questions is “yes” for at least half of the members of the board members, then demand is excused as futile.”
The new three-part test is significant for derivative litigants. Under the new test, a director who is only alleged to have engaged in conduct that is exculpated by §102(b)(7) is qualified from considering a demand. As a practical matter, the adoption of the new test simplifies the analysis of whether a demand was excused as futile. Today, litigants will no longer need to question the application of one test instead of another.
Key Sources:
Aronson v. Lewis, 473 A.2d 805 (Del. 1984).
Ch. Ct. R. §23.1.
Code Ann. tit. 8, § 102(b)(7).
Holger Spamann, Scott Hirst & Gabriel Rauterberg, Corporations in 100 Pages, (3d ed. 2022).
Rales v. Blasband, 634 A.2d 927 (Del. 1993).
United Food and Com. Workers Union v. Zuckerberg, 250 A.3d 862 (Del. Del. Ch. 2020).
United Food and Com. Workers Union v. Zuckerberg, 262 A.3d 1034 (Del. 2021).