United States: Delaware Court Of Chancery Dismisses Derivative Suits Alleging Directors Wrongfully Refused Litigation Demands

Last Updated: December 13 2016
Article by Gregory A. Markel and Heather E. Murray

Seyfarth Synopsis: On November 30, 2016, The Delaware Court of Chancery dismissed two derivative suits filed on behalf of the Bank of New York Mellon ("BNYM"). The companion memorandum and letter opinions reaffirm the heavy burden a plaintiff faces to successfully plead that directors wrongfully refused its litigation demand.


Plaintiff stockholders Murray Zucker and Carole Kops made separate litigation demands on BNYM's board of directors on March 9, 2011 and May 24, 2012, respectively, requesting an investigation of alleged breaches of fiduciary duty stemming from BNYM's foreign exchange practices.  Shortly after receiving the Zucker demand, a Special Committee of independent directors hired counsel Cravath, Swain and Moore LLP to assist it in its investigation of the Zucker demand.  On December 14, 2011, the Company issued its demand refusal letter to Zucker after the Special Committee recommended demand refusal and non-management directors adopted the Special Committee's recommendations.  Plaintiff Zucker first filed suit in New York state court in late 2011 alleging improper demand refusal and breach of fiduciary duties, which was dismissed without prejudice on October 1, 2013.  Zucker then made a books and records demand pursuant to Section 220 seeking documents related to Cravath's investigation and the Special Committee process, which was administratively consolidated with a similar action filed by Plaintiff Kops.  Aided by information provided in the Section 220 actions, Zucker filed his derivative complaint in this action on October 20, 2015, and Kops ultimately filed her complaint on February 10, 2016.  Both plaintiffs sought to recover from certain current and former directors, officers, and employees for losses arising from Bank of New York Mellon's foreign exchange practices, which has resulted in fines and payments from lawsuits and regulatory actions of upwards of one billion dollars.  The Court dismissed both actions for failure to adequately plead that the litigation demands were wrongfully refused on the basis of gross negligence or bad faith.


1. The Existence of and Size of Settlements with Government Agencies Standing Alone Does Not Raise an Inference of Directors' Gross Negligence in Refusing a Demand.  Plaintiff Zucker argued that BNYM's 2015 foreign exchange settlements with government agencies are irreconcilable with the Special Committee's 2011 conclusion that there was no actionable wrongdoing.  Thus, plaintiff claimed it could only be explained by gross negligence on the part of the Special Committee in relying on Cravath's investigation.  The Court emphasized in rejecting this argument that "the applicable question here is not whether the conclusion of Cravath, the Special Committee or the Board was 'wrong'; 'the question is whether the Board was grossly negligent in failing to inform itself, or intentionally acted in disregard of the Company's best interests in deciding not to pursue the litigation the Plaintiff demanded.'"  Here, the Special Committee adequately informed itself in hiring Cravath to conduct an investigation that involved the review of over 10,000 documents, 13 interviews with current and former company officials, and several Special Committee meetings wherein the Committee reviewed Cravath's work before presenting its ultimate conclusions to the board.

2. The Type or Number of Documents Reviewed by the Special Committee Does Not by Itself Support a Finding of Gross Negligence.  Plaintiff Zucker complained that the Special Committee could not absent gross negligence have concluded there was no wrongdoing at BNYM because it reviewed only 28 documents, some of which Plaintiff alleged showed certain defendants knew that BNYM reaped benefits through the foreign exchange practices at issue.  It further argued that no documents supported the conclusion that even assuming actionable wrongdoing it was nonetheless not in BNYM's interests to pursue the demand.  Plaintiff Kops likewise asserted that the Special Committee was not adequately informed.  The Court reaffirmed that complaints about the types of documents reviewed or the choice of persons to be interviewed will not generally support a finding of gross negligence.  Here, the existence of one or a few troubling documents was insufficient for the Court to infer bad faith or gross negligence on the part of the Special Committee in determining not to proceed with legal action.  The Court noted that it is the Special Committee's prerogative to evaluate all other work it and Cravath performed in addition to the troubling documents to reach its conclusion.  The Court in rejecting a related argument that Plaintiff Zucker should receive an inference in his favor due to the fact that Cravath gave an oral presentation and not a written report reaffirmed that a written report is not required by Delaware law.

3. No Requirement that the Special Committee Revisit its Conclusions.  Plaintiffs Zucker and Kops argued that even if the Special Committee's decision to refuse the demand was reasonable when made, subsequent developments rendered it unreasonable and therefore require the Special Committee to revisit its conclusions.  The Court found no general duty for a board to revisit prior demands in perpetuity.

4. Brevity of Special Committee Deliberations or Inconsistencies in Record Alone Do Not Establish Special Committee Failed to Act in Good Faith.  Plaintiff Kops asserted that demand was wrongfully refused because the Special Committee relied wholly on the previous Zucker investigation and that there was no evidence that intervening developments were given consideration.  However, the June 12, 2012 full-board meeting talking points and the June 21, 2012 demand refusal letter indicate that Cravath and the Special Committee discussed developments that have occurred since finishing the prior investigation.  Plaintiff in response argued that there was an inconsistency in the record, since May Special Committee meeting minutes and talking points failed to include this description.  Plaintiff additionally asserted that due consideration by the Special Committee was impossible because the meeting evaluating the demand lasted only around 30 minutes.  The Court in rejecting Plaintiff's argument found that the omissions in the May documentation did not create a reasonable inference that intervening events were not considered in light of affirmative language in contemporaneous documents.  The Court likewise reaffirmed that brevity in directors' deliberations alone does not imply gross negligence.  At the time the decision was reached, the Special Committee had been constituted for over a year and had already become closely familiar with Cravath's investigation.

For a full copy of the Zucker opinion, click here.  For a full copy of the Kops opinion, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Gregory A. Markel
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions