ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, November 11, 2008

Business Associations Limerick of the Week: Grimes v. Donald

Nietzsche Grimes v. Donald always makes me think of Nietzsche's Unzeitgemaesse Betrachtungen, cleverly translated as "Thoughts out of Season."  Grimes brought a shareholder derivative suit challenging an executive compensation scheme that permitted the CEO (Donald) to declare himself "constructively terminated" if he felt that the board was interfering with his management of the company.  Such a declaration would result in rich benefits to Donald.  Grimes claimed that the scheme amounted to an abdication by the board of its fiduciary responsibilities.  He also challenged the compensation as excessive.  The former claim, the court held, was direct; the latter, derivative. 

The case is of interest because of its discussion of Delaware's demand requirement.  We need the derivative suit mechanism to permit shareholders to hold boards of directors accountable, but we can't permit each shareholder to drag a corporation into court each time a shareholder disagrees with a board's decision.  Thus, shareholders are required to bring a demand to the board so that the board can first determine whether it is in the corporation's interest to pursue the claim. 

Demand is almost always refused and such refusals are subject to the business judgment rule.  So a well-counseled plaintiff will always claim that demand is excused as futile -- e.g., because a majority of the members of the board have an interest in the challenged transaction and cannot be expected to pursue a claim against themselves.  For reasons that are unclear, Grimes made demand and, after it was refused, he now sought to make all the arguments he should have made at an earlier point in the litigation. 

The Chancellor found that by making demand, Grimes had essentially conceded that demand was not excused.  The Delaware Supreme Court affirmed, noting in effect that his thoughts regarding demand futility were rendered out of season.

Grimes v. Donald

The payments to Donald were grand,
So Grimes made the required demand.
In findings most reasonable
The court found unseasonable
Grimes' claims, and its judgment will stand.

[Jeremy Telman]

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