Chancery Rejects Plaintiff’s Attempt to Recharacterize Pre-Suit Demands

Morris James LLP

The Raj & Sonal Abhyanker Fam. Tr. v. Blake, C.A. No. 2020-0521-KSJM (June 17, 2021)

Court of Chancery Rule 23.1 presents a would-be derivative plaintiff with two exclusive options: make a pre-suit demand on the board to bring the claims at issue, or bring the claims and plead demand futility. A stockholder who elects to make a demand on the board may challenge whether the board wrongly refused the demand, but the stockholder cannot later bring suit and allege demand futility. And, as this case shows, the Court of Chancery will scrutinize a stockholder’s attempt to circumvent this restriction.

The plaintiff is a stockholder of UpCounsel who disputed the terms of a 2019 transaction between UpCounsel and LinkedIn. In January 2020, the plaintiff sent two separate e-mails to UpCounsel’s board alleging that certain directors breached their fiduciary duties in approving the deal. The e-mails insisted, among other things, that the board remove the directors and pursue claims against them. After UpCounsel’s board refused to act as requested, the plaintiff brought fiduciary duty and other claims against the directors.

Faced with a motion to dismiss, the Court concluded that the e-mails were demands under the three-part test from Yaw v. Talley, 1994 WL 89019 (Del. Ch. Mar. 2, 1994) to determine whether a pre-suit communication constitutes a pre-suit demand. That is, the e-mails identified the alleged wrongdoers, identified the alleged wrongdoing, and identified the legal action that plaintiff wanted the board to take. Additionally, the e-mails cited case law (including Rales) and repeatedly used the word “demand.” In the Court’s view, it would have “unreasonabl[y] contort[ed]” the plaintiff’s e-mails to characterize them as anything other than pre-suit demands. Because the plaintiff’s fiduciary duty claims were the same as those addressed in its demands, the Court dismissed the claims. Similarly, the Court dismissed the plaintiff’s unjust enrichment claim because it also arose from the subject matter of plaintiff’s e-mails.

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