The Delaware Supreme Court, adopting a test formulated by the Court of Chancery below, collapsed these analyses into a single test:
[F]rom this point forward, courts should ask the following three questions on a director-by-director basis when evaluating allegations of demand futility:
(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.
Zuckerberg, 262 A.3d at 1059.
Demand is excused as futile if the answer to any of the questions is “yes” for at least half of the board members. Id. The court noted that the test refocuses the inquiry on the litigation demand decision, not the underlying decision being challenged. And, it is important to note, the court held that “this refined standard is consistent with Aronson, Rales, and their progeny” and “cases properly applying those holdings remain good law.” Zuckerberg, 262 A.3d at 1041.
Demand Futility Post-Zuckerberg: Superficial Change or Substantive Shift in the Law?
As explained above, Zuckerberg can be read as both changing and preserving Delaware law on demand futility. So how have litigants and lower courts applied Zuckerberg so far?
At least one litigant has argued that Zuckerberg “adopted a new unified standard for pleading demand futility that is more difficult to satisfy than the previously prevailing Aronson/Rales standards,” Feuer v. Zuckerberg, No. CV 2018-0307-JRS, 2021 WL 5174098, at *1 (Del. Ch. Nov. 8, 2021). This argument came up in an unusual context: The plaintiff, who made a pre-suit shareholder derivative demand on Facebook’s board, advanced it to argue that his case should not be stayed pending resolution of a similar complaint asserting demand futility. See id. Although the Court of Chancery did not explicitly address the comparison of Zuckerberg and Aronson/Rales, it did, in dismissing the plaintiff’s argument, note that Zuckerberg’s holding on exculpated care claims “confirms what this court has been holding for years. . . .” Id. at *2.
More generally, the Delaware Court of Chancery has thus far treated Zuckerberg as changing the form of the demand futility test but not necessarily the substance as applied under Aronson and Rales. More than one decision, for example, has concluded that Zuckerberg did not even warrant supplemental briefing. See, e.g., SDF Funding LLC v. Fry, 2021 WL 4519599, at *5 (Del. Ch. Oct. 4, 2021).
That said, Zuckerberg obviously will have an impact on how Delaware courts approach the issue of demand futility. Most immediately, the new three-part test should eliminate disputes and briefing about whether the Aronson test or the Rales test controls the demand futility analysis. For example, the Court of Chancery recently held that a disagreement over this question “became moot” after Zuckerberg. See Firemen’s Ret. Sys. of St. Louis on behalf of Marriott Int’l, Inc. v. Sorenson, No. CV 2019-0965-LWW, 2021 WL 4593777, at *7 (Del. Ch. Oct. 5, 2021).
The fact that derivative plaintiffs and defendants have previously been willing to litigate whether Aronson or Rales controls also suggests that replacing these two tests with a single inquiry is more than just a superficial change. So what more does Zuckerberg do? The clearest change is to eliminate the second prong of the Aronson test, which permitted a plaintiff to plead demand futility by raising a reasonable doubt about whether “the challenged transaction was otherwise the product of a valid exercise of business judgment.” Aronson, 473 A.2d at 814. At least initially, this allowed a plaintiff to plead futility by focusing only on the challenged action itself, and not on whether there were other indicia of partiality among the demand board. As Zuckerberg explained, this focus on the challenged transaction was really a proxy for the true question of demand futility: whether the directors faced a substantial risk of personal liability. But after Delaware enacted section 102(b)(7) of its General Corporation Law to allow corporations to exculpate their directors for breaches of the duty of care, this “core premise” of Aronson—that “an elevated standard of review standing alone results in a substantial likelihood of liability sufficient to excuse demand”—was rendered “non-viable.” Zuckerberg, 262 A.3d at 1058. In other words, now that directors can be exculpated for breaches of the duty of care, evaluating whether a corporate transaction may have breached that duty says much less about directors’ likelihood of personal liability—and hence demand futility.
In short, Zuckerberg clarifies that it is the directors’ ability to impartially respond to a litigation demand and their actual risk of personal liability—not the merits of a decision challenged in the underlying allegations—that determines whether demand is excused as futile. This is consistent with how Delaware law was applied prior to Zuckerberg: As the opinion notes, Delaware courts already would generally decline to find demand futility based on board decisions qualifying for exculpation. But Zuckerberg removes any doubt about this nuance of Delaware shareholder derivative litigation. This is important conceptually, though its practical impact may be muted, at least in cases involving exculpated care claims.
Another noteworthy area to watch is how the Delaware Supreme Court’s decision in Zuckerberg affects the demand futility laws of other states—particularly those that previously adopted or employed Aronson or Rales. See, e.g., Oakland Raiders v. Nat’l Football League, 93 Cal. App. 4th 572, 586 (2001); Chur v. Eighth Jud. Dist. Ct., 458 P.3d 336, 340 (Nev. 2020); In re F5 Networks, Inc., 207 P.3d 433, 439 (Wash. 2009). Although Zuckerberg has yet to be cited by any out-of-state court, its simplification and clarification of the competing demand futility tests under Aronson and Rales would seem appealing to other jurisdictions that have followed that framework. That said, much of Zuckerberg’s reasoning rests on how Delaware law specifically has developed since Aronson and Rales were issued. Thus, it is conceivable that other courts may conclude that reasoning does not fit neatly into the law of their own states.
Conclusion
In sum, Zuckerberg announces a very clear and welcome change to the form of Delaware law on demand futility, replacing two tests with one universal test. But the underlying substantive change—recentering on the partiality of the demand board rather than the merits of the challenged decision—had already occurred as a practical matter in the courts’ application of Delaware law prior to the Delaware Supreme Court’s formal endorsement of that change. Whether Zuckerberg precipitates further change in the substance of the law, in Delaware or elsewhere, remains to be seen.
