As discussed in the first article in this two-part series, a number of court decisions address the circumstances under which a stay of a stockholder derivative litigation is appropriate in the face of parallel proceedings. But what about when a board receives a stockholder demand for board action in connection with events that are the subject of ongoing litigation or investigations? Such demands typically set forth a litany of purported harms suffered by the corporation, and request that the board investigate the allegations described therein and commence litigation against the company’s directors, officers, and/or others. Under Delaware law, a board cannot simply ignore the demand. But taking the action demanded while in the midst of parallel proceedings can raise similar concerns to those posed by simultaneous derivative litigation. Moreover, corporations may face the anomalous situation of a demand from one stockholder (which, under Delaware law, is a concession that a majority of the board is capable of considering a demand, i.e., demand is not futile) while simultaneously litigating a derivative case brought by a different stockholder taking the opposite position – i.e., that demand is futile. Unfortunately, there is far less judicial guidance on how boards and companies can and should navigate these shoals.
Reproduced with permission from Securities Regulation & Law Report, 46 SRLR 1893, 09/29/2014. Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com