A cardinal precept of Delaware law is that directors, rather than shareholders, manage the business and affairs of the corporation. In the context of shareholder requests that the company pursue litigation, the decision whether to pursue litigation on behalf of the company generally resides with the board as an exercise of business judgment. A shareholder lacks standing to bring suit on the company’s behalf unless the shareholder (i) has demanded that the directors pursue the corporate claim and the demand is wrongfully refused; or (ii) purports to initiate litigation on behalf of the company and alleges with particularity why pre-suit demand is excused as futile.
The typical shareholder derivative claim seeks to assert state law claims. In re The Home Depot, Inc. Shareholder Derivative Litigation, a recent decision from the U.S. District Court for the Northern District of Georgia that applied Delaware law, weighed in on a recurring question regarding the demand requirement on which courts have differed: whether pre-suit demand is required for claims alleging a violation of Section 14(a) of the Securities Exchange Act of 1934 (Exchange Act).1Home Depot is the latest in a series of shareholder derivative actions arising from high-profile data breaches to be dismissed in recent years, with the court holding that Delaware’s demand requirement applies equally to Section 14(a) claims.
