In the following guest post, Gregory A. Markel, Paul Ferrillo, Daphne Morduchowitz and Sarah A. Fedner take a look at and consider the implications of the Delaware Supreme Court’s September 23, 2021 decision in United Food and Commercial Workers Union v. Zuckerberg, et al, in which the Court articulated a new test for determining whether demand is excused as futile in shareholder derivative actions under Delaware law. Greg, Paul, and Daphne are partners and Sarah is an associate at Seyfarth Shaw LLP. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.


This article provides a summary of a September 23, 2021 decision of the Delaware Supreme Court (the “September 23 Decision”),[1] which created a new three-part test in determining whether a demand is excused in shareholder derivative actions. This new test combines two separate demand futility standards previously applied by Delaware courts and, as such, the substance of the law largely remains the same. This article evaluates how directors should continue to protect themselves from potential derivative litigation going forward.


The New Demand Futility Test

Under the new standard adopted by the Supreme Court in its September 23 Decision, a court must ask the following three questions concerning each individual director in determining whether a demand would be futile:

(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.

A demand is excused as futile and therefore no demand is required to proceed, if the answer to any of these three questions is “yes” for at least half of the board members.

Prior to the September 23 Decision, Delaware courts applied two different demand futility tests depending on whether or not the board, at the time of the demand/lawsuit, was involved in the transaction being challenged by shareholders. If the board was involved in the challenged transaction, Delaware courts applied the standard set forth by the Delaware Supreme Court in Aronson v. Lewis, which evaluated whether: (1) “the directors are disinterested and independent” or (2) “the challenged transaction was otherwise the product of a valid business judgment.” If the demand board was not involved in the challenged transaction, Delaware courts applied the standard set forth in a separate Supreme Court decision, Rales v. Blasband. Under the Rales standard, a demand was not futile and therefore required to be made if  “the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.”

The Delaware Supreme Court expressly stated in its September 23 Decision that the reasoning underlying the Rales and Aronson decisions is consistent with its new three-part test and, as such, these two cases and their progeny are still good law. Despite this, the Delaware Supreme Court noted that the specific three-part test set forth in the September 23 Decision should be used going forward to determine whether a demand is futile, instead of the tests previously set forth in Rales and Aronson.

The Court also expressly stated that evolutions in the law since Aronson have made it more difficult to apply the Aronson test. Specifically, under Section 102(b)(7) of Delaware General Corporation Law (“Section 102(b)(7)”), corporations can now adopt charter provisions exculpating directors from liability for breaching their fiduciary duty of care. As such, in order to show a demand is futile under the second prong of Aronson (which is now the second prong of the new three-part test), a shareholder must allege that the director defendants committed some non-exculpated breach of fiduciary duty.


Minimizing Risks of Derivative Litigation Against Directors and Officers Going Forward

The new three-part test takes elements of both the Rales and Aronson standards and incorporates already established principles of Delaware law. The opinion emphasizes that directors, instead of shareholders, should usually control a company’s affairs and that there is a high bar in establishing demand futility. Thus, the substantive standard for demand futility largely remains the same after the September 23 Decision.

However, there are now three specifically enumerated scenarios in which a demand may be excused, only one of which needs to be shown for the majority of directors. Under the Aronson test, there were only two scenarios. The new test focuses not only on whether the board acted independently and in good faith at the time of the challenged transaction, but also whether the board could do so at the time of the demand. The test also looks not only on whether a director personally benefited from the transaction or faces a substantial risk of liability related to the transaction to whether the director lacks independence from someone else who benefited or faces liability.

The September 23 Decision performed a director specific analysis of the third prong of the test, i.e. whether certain individual directors lacked independence from someone materially benefiting from the transaction. Based on this analysis, we know that, for example, merely alleging that a director was friends with or donated to the same charity as a person who received material benefit, without more, is insufficient to satisfy the third prong of this test.[2]

There are several things directors can do in the wake of this decision to minimize the risks that a shareholder demand will be excused as futile and to minimize their liability:

  • Add a Section 102(b)(7) exculpatory provision to the company charter: Adding such a clause will make it more difficult for shareholders to identify and bring non-exculpated claims against directors, reducing the possibility for shareholders to show a demand is futile under the second prong of the new three-part test. Such provisions, however, will not insulate the board if a plaintiff can sufficiently allege that a majority of the board acted in bad faith.
  • Uphold fiduciary duties: Board members should continue to act in an informed manner, with the best interests of the company in mind. It may be beneficial for directors to receive regular updates from either in-house or outside experts regarding the ever evolving standards of upholding their fiduciary duties in various aspects of corporate affairs.
  • Disclose potential conflicts of interest and obtain outside experts: Boards should perform a thorough analysis of whether each director may be conflicted by the transaction at issue. To assist with this process, boards should consult inside, as well as outside legal experts. This will help a board in showing that it acted in a reasonably prudent, independent manner in considering the transaction at issue in any subsequent litigation.
  • Create special committees to approve transactions: In scenarios where at least some members of the board may potentially be conflicted, it is usually prudent to create a special committee of the board to oversee and make recommendations relevant to the transaction. Creating special committees reduces the likelihood that shareholders can show the decision was led by board members with an interest in the transaction.
  • Create special litigation committees to investigate the allegations underlying the litigation: Even if shareholders adequately plead demand futility, a board can and often should still appoint an independent committee to oversee the litigation and move to stay the litigation while this special committee performs an investigation. Such an investigation could assist the defendants in showing that the board acted with reasonable diligence and could serve as the basis of a subsequent motion to dismiss the action.
  • Implement shareholder votes: Implementing a shareholder vote is a means by which a corporation could successfully move to dismiss a derivative complaint, even in a demand excused case. A shareholder vote in support of the transaction helps demonstrate that the transaction was, in fact, in the best interest of the company and thereby mitigates claims that directors acted solely in their own personal interest in approving such transactions.
  • Obtain D&O insurance: Boards should continue to ensure that they have adequate D&O insurance to protect against any potential claims they may face. Companies should interview and work closely with a D&O broker as a trusted advisor to ensure that they choose the right policies.



The main take away from the September 23 Decision is that there is an increased value to adding a Section 102(b)(7) provision to a corporate charter, over the already very substantial value of such provisions.  The Delaware Supreme Court has re-emphasized that normally the board makes decisions for the corporation and, only were an exception to this rule is justified, is it otherwise. The new ruling makes clearer, rather than changes, the type of showing that must be made to justify an exception. For that clarity, lawyers, judges and insurers should be grateful.


[1] United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020, 2021 WL 4344361 (Del. Supr. Ct. Sept. 23, 2021).

[2] Id. at 2-3.