Oversight and Good Faith Oversight

Question 1

What are the three main ways to get a pre-suit demand excused?

Answer 1

1. make particularized factual allegations in the derivative stockholder compliant that create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand
2. show that the defendant directors face a substantial likelihood of liability that renders them personally interested in the outcome of the decision on whether to pursue the claims asserted in the complaint
3. show that the directors’ behavior included the elements of bad faith that constitute a violation of their duty of loyalty, and that the directors were therefore ineligible for exculpation under the company’s “Section 102(b)(7)” clause

Question 2

Washburn Corp. (WS Corp.) is responsible for the construction of several buildings in downtown Topeka. A few WS Corp. employees use faulty materials in constructing the buildings and, during a tornado, a few of the WS Corp. buildings are badly damaged. The City of Topeka sues WS Corp. for several million dollars and wins. Subsequently, a WS Corp. shareholder, X, files a derivative lawsuit against the directors of WS Corp. for failure to take, or even to consider taking, action sufficient to oversee the WS Corp. employees or sufficient to prevent the type of misconduct that resulted in the Topeka wrongdoing. In X’s lawsuit against WS Corp. …

Answer 2

The WS Corp. directors would not have the protection of the business judgment rule