On September 23, the Delaware Supreme Court issued a decision replacing the Aronson test the futility of demand and instead adopt and affirm a new universal Rails-as the test applied below by Vice-Chancellor Laster as follows:
From that point on, courts should ask the following three questions administrator by administrator when assessing allegations of futility of the claim:
- Did the administrator gain material personal benefit from the alleged misconduct that is the subject of the lawsuit?
- Does the administrator face a substantial likelihood of liability for any of the claims that would be the subject of the legal action?
- Does the administrator lack independence from someone who has derived material personal benefit from the alleged misconduct that would be the subject of the lawsuit or face a substantial likelihood liability on one of the claims that are the subject of the legal action?
If the answer to any of the questions is “yes” for at least half of the request committee members, then the request is excused as frivolous. It is no longer necessary to determine whether the Aronson the test or the Rails test governs claims of uselessness in requesting a complaint.
As the Court explained: “This approach deals with[s] Rails as the popular demand futility test, while relying on Aronson– similar principles when it comes to assessing whether particular directors face a substantial probability of liability for having participated in the decision to approve the [transaction]. ” Rails is more flexible and arguably broader than Aronson, focusing on the decision on the litigation request rather than the contested transaction.
In substance, this is not a major departure from existing principles and the Court has made it clear that the cases applying Aronson and Rails remains a good law. However, the reformulated test is a new paradigm for derivative claims that will likely end up in other courts across the country over time (such as Aronson made in many states).