Aronson v. Lewis

473 A.2d 805 (1984)

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Nature of the Case

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Facts

In 1979, Prudential Building Maintenance Corp. (Prudential) spun off its shares of Meyers (D) to Prudential's stockholders. Meyers (D) was a wholly owned subsidiary of Prudential. P sued to challenge certain transactions between Meyers and one of its directors, Leo Fink, who owns 47% of its outstanding stock. Fink had an employment agreement with Prudential where he was to become a consultant to that company for ten years upon his retirement. D agreed with Prudential to share Fink's consulting services and reimburse Prudential for 25% of the fees paid D. Under this arrangement, D paid Prudential $48,332 in 1980 and $45,832 in 1981. D approved an employment agreement with Fink for a five-year term with provision for automatic renewal each year. D agreed to pay Fink $150,000 per year, plus a bonus of 5% of its pre-tax profits over $2,400,000. Fink could terminate the contract at any time. D could so do but only upon six months' notice. At termination, Fink was to become a consultant to D and be paid $150,000 per year for the first three years, $125,000 for the next three years, and $100,000 thereafter for life. Death benefits were also included. Fink agreed to devote his best efforts and substantially his entire business time to advancing D's interests. The agreement was not to be affected by any inability to perform services on Meyers' behalf. Fink was 75 years old when his employment agreement with Meyers was approved by the directors. There is no claim that he was, or is, in poor health. D also made interest-free loans to Fink totaling $225,000. P charged that these transactions had 'no valid business purpose', and were a 'waste of corporate assets' because the amounts to be paid are 'grossly excessive', that Fink performs 'no or little services', and because of his 'advanced age' cannot be 'expected to perform any such services'. The complaint alleged that no demand had been made on the D board because all of the directors in office are named as defendants and each had participated in, expressly approved and/or acquiesced in, and are personally liable for, the wrongs complained of herein. P also alleged that Fink, having selected each director, controls and dominates every member of the Board and every officer of D. D moved to dismiss for failure to make demand on the D's board prior to suit or to allege with factual particularity why demand is excused. The judge held that the test of futility is 'whether the Board, at the time of the filing of the suit, could have impartially considered and acted upon the demand.' It held that to establish demand futility, a plaintiff need not allege that the challenged transaction could never be deemed a product of business judgment. P 'must only allege facts which, if true, show that there is a reasonable inference that the business judgment rule is not applicable for purposes of considering a pre-suit demand pursuant to Rule 23.1'. The court concluded that this transaction permitted such an inference. It held that a plaintiff must allege ownership plus other facts evidencing control to demonstrate that the Board could not have exercised its independent business judgment. This appeal resulted. Ds assert that the demand requirement embraces the policy that directors, rather than stockholders, manage the affairs of the corporation. They contend that this fundamental principle requires the strict construction and enforcement of Chancery Rule 23.1. Ds also contend that demand futility requires factual particularity in its pleadings.