By: Julie Jopp
Recently, the Delaware Court of Chancery clarified the requirement under Chancery Rule 23.1 in a decision issued on December 15, 2021. Rule 23.1 requires that when a stockholder asserts a derivative claim, they must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort”.
When a stockholder does not make a demand, there are stringent requirements when asking for the demand to be excused. The three-part test in United Food & Commercial Workers Union v. Zuckerberg is used to determine if the demand can be excused. The factors the court considers for each director:
(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
Demand is excused if the answer to the questions is ‘yes’ for at least half of the members of the board of directors.
In the recent case, plaintiff, Kraft Heinz, alleged breach of fiduciary duty against defendant, 3G. “The plaintiff’s claims are based on allegations that the defendants either approved 3G’s stock sale based on adverse material nonpublic information or allowed 3G to effectuate the sale to the detriment of Kraft Heinz and its non-3G stockholders.” However, to assert this claim, Kraft Heinz needed to follow Rule 23.1 and make a demand on the board or have a situation where demand would be excused. Kraft Heinz did not make a demand on the “. . .board and maintain that demand should be excused because a majority of the board is not independent of 3G.”
The case turned on an analysis of just the third element of the test, as the others do not apply. Also, the court only examined six of the eleven directors – the defendants conceded three directors were not impartial and the plaintiffs conceded that two were independent. “If four of these six directors could exercise their independent and disinterested judgment regarding a demand to sue 3G, Rule 23.1 mandates dismissal.” The court considered “. . .all the particularized facts pled by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiffs.”
In summary, the various findings the court made that concluded director independence include: a non-profit chairman who receives donations from an organization that 3G controls, directors “beholden” to a third-party company that has a relationship with 3G, non-family ties to 3G’s co-founder, previous consulting compensation with Kraft Heinz that 3G was not involved with in any way prior to the merger of Kraft Heinz and 3G, and a director’s son’s employment with a company who may have a direct relationship with a 3G founding partner. Because Kraft Heinz could not plead facts to form a reasonable doubt to show that a majority of the directors were independent and disinterested in 3G, demand was not excused and the complaint was dismissed.
In making this decision, the court is emphasizing that it is more than likely a board member is impartial unless plaintiffs can prove directors have a strong connection directly to the organization. The court would have to reasonably infer that a connection would cause someone to be motivated to cover up insider trading to trigger excused demand.
 In re Kraft Heinz Co. Derivative Litig., No. CV 2019-0587-LWW, 2021 WL 6012632, at *10 (Del. Ch. Dec. 15, 2021)
 Id. (quoting Ct. Ch. R. 23.1)
 In Re Kraft Heinz, 2021 WL 6012632, at *10
 Id. at *11-12 (quoting United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020, 2021 WL 4344361, at *9, (Del. Sept. 23, 2021)).
 Id. at *1
 In Re Kraft Heinz, 2021 WL 6012632, at *1
 Id. at *13
 Id. at *14
 Id. at *18
 In Re Kraft Heinz, 2021 WL 6012632, at *19
 Id. at *21
 Id. at *24
 Id. at *27
 In Re Kraft Heinz, 2021 WL 6012632, at *30
 Id. at *31
 Id. at *31