In re The Dow Chemical Co. Derivative Litigation, No. 4349-CC, 2010 WL 66769 (Del. Ch. Jan. 11, 2010)

• Author: Michael Kunz
• Pages: 75-75

B u s i n e s s L a w B r i e f | S p r i n g / S u m m e r 2 0 1 0 7 5

In re The Dow Chem. Co. Deriv.

Litig., No. 4349-CC, 2010 WL

66769 (Del. Ch. Jan. 11, 2010)

By: Michael Kunz, Junior Editor

In In re The Dow Chemical Co.

Derivative Litigation, shareholders of the

Dow Chemical Company (Dow) brought

a derivative suit in which they alleged that

a number of directors breached their fidu-

ciary duties.

1

In dismissing these claims,

the Court of Chancery of Delaware out-

lined and reaffirmed the tests for pleading

demand futility in a derivative suit and

the principle of the business judgment

rule.

2

In late 2007, Dow’s board of direc-

tors entered into an agreement for a joint

venture with Kuwait’s Petrochemicals

Industries Company, which was expected

to close in late 2008 and would result in

the Kuwaiti company paying Dow nine

billion dollars.

3

In July of 2008, with

the joint venture still pending, Dow’s

board approved a merger agreement with

the Rohm & Haas Company (R & H),

which obligated Dow to acquire all of R

& H’s stock for $18.8 billion regardless

of Dow’s ability to obtain financing.

4

Fol-

lowing a succession of economic events

that left Dow in a substantially worse

financial position, the Kuwaiti company

rescinded the transaction.

5

Despite the

joint venture’s failure, Dow’s board agreed

to proceed with the R & H merger, but

could not successfully delay the merger’s

closing.

6

The board ultimately refused

to close the merger, citing economic and

viability concerns.

7

While R & H initially

sought specific performance, the merger

was eventually consummated under a

settlement between the parties.

8

This derivative suit alleged that

Dow’s board breached their fiduciary duty

by proceeding with the merger, in mak-

ing misrepresentations, and by breaching

their fiduciary oversight duties under

Caremark.

9

The court stated that the

plaintiffs were required to demonstrate

why demand would be futile since the

shareholders’ suit was derivatively chal-

lenging a board’s decision, and subse-

quently proceeded to explain and apply

the tests for demand futility.

10

The court reiterated that a share-

holder seeking to sue derivatively must

first make a demand requirement.

11

This requirement can be excused only by

showing that it would be futile because

a majority of the directors have such a

personal stake in the issue that they would

be unable to make a proper business

judgment as to the demand.

12

The court

further clarified that different standards

apply for conscious and unconscious

board decisions.

13

For conscious deci-

sions, such as the Dow board’s approval

of the R & H merger, a two-prong test

applies.

14

Under this test, announced in

Aronson v. Lewis, plaintiffs must allege

particularized facts that create a reason-

able doubt that: (1) a majority of the

board is disinterested and independent,

or (2) the transaction was a product of

the board’s valid business judgment.

15

Alternately, unconscious decisions—such

as the board’s alleged failure to super-

vise—are governed by Rales v. Blasband,

which states that demand is futile when a

director’s conduct is so flagrant, due to a

significant probability of personal liabil-

ity, that it cannot be viewed as a product

of legitimate business judgment.

16

After elucidating these requirements,

the court found that demand could not be

excused in any of the derivative claims.

17

Notably, the court reemphasized the rule

announced in Brehm v. Eisner that a

majority of the board’s beholdenness to

another party is immaterial if no direc-

tor is interested in the transaction.

18

Furthermore, the court reaffirmed the

business judgment rule by emphasizing

that it requires focusing on the process

a board followed, rather than a disagree-

ment as to the substantive decisions made

therein.

19

The court also stressed that a

claim based on director oversight liability

requires a showing of bad faith or con-

scious disregard of duty—a burden that

these shareholders were unable to meet.

20

In sum, the court’s discussion and treat-

ment of demand excusal requirements

accentuates the substantial requirements

that shareholders must meet to initiate

a derivative suit without board approval

and demonstrates the court’s commit-

ment to established principles of business

administration.

Endnotes

1 In re The Dow Chem. Co. Derivative Litig., No.

4349-CC, 2010 WL 66769, at *1 (Del. Ch. Jan. 11,

2010).

2 Id. at *15.

3 Id. at *1.

4 Id. at *2.

5 Id. at *3.

6 Id. at *4.

7 In re Dow, 2010 WL 66769, at *4.

8 Id. at *6.

9 Id. at *5.

10 Id. at *6.

11 Id.

12 Id.

13 In re Dow, 2010 WL 66769, at *6.

14 Id.

15 Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).

16 In re Dow, 2010 WL 66769, at *6; see also Rales v.

Blasband, 634 A.2d 927, 930 (Del. 1993).

17 In re Dow, 2010 WL 66769, at *15.

18 Id. at *7; see also Brehm v. Eisner, 746 A.2d 244,

258 (Del. 2000).

19 In re Dow, 2010 WL 66769, at *9.

20 Id. at 12.

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