, which, as I’ll explain, allowed shareholders to proceed with derivative suits by accusing board members of approving tainted transactions.
Facebook subsequently dropped the plan after a raft of shareholder suits – but not before spending more than $90 million to defend the reclassification and then pay the plaintiffs' lawyers whose litigation led to its abandonment. The Tri-State fund’s derivative lawsuit alleged that Facebook board members breached their duties of care and loyalty when they backed Zuckerberg’s aborted reclassification plan.
Laster’s key point was that a change in Delaware’s corporate code has undermined the rationale of the 1984 ruling. The Aronson court, he said, used business judgment deference as a sort of proxy for board members’ personal liability risk, reasoning that if the board was not entitled to deference for the underlying transaction, directors were at higher risk and therefore not be relied upon to make an independent decision about whether the corporation has a cause of action.
Laster proposed an alternative, three-part test for demand futility that, he said, harmonized Aronson and a successor case, 1993’s. Courts should determine whether the director received a personal benefit from the misconduct alleged by shareholders; whether the board members faced substantial risk of liability for shareholders’ claims; and whether the director is dependent on someone – presumably a controlling shareholder – who benefited from the deal at issue.
In light of that holding, the Supreme Court said, it was adopting Laster’s three-part test for demand futility. The Laster test, Montgomery-Reeves said, blended Aronson and Rales precedent to address the crucial question of whether directors can be trusted to act in the best interests of the corporation.
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