Rales v. Blasband Ex Rel. Easco Hand Tools, Inc.
634 A.2d 927 (1993)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When a derivative suit does not challenge a business decision made by the current board of directors, the two-part Aronson test for demand futility is inapplicable. Instead, a court must determine whether the complaint's particularized factual allegations create a reasonable doubt that a majority of the board could have exercised its independent and disinterested business judgment in responding to a demand.
Facts:
- Steven and Mitchell Rales (the 'Rales brothers') were directors and controlling shareholders of both Easco Hand Tools, Inc. ('Easco') and Danaher Corporation ('Danaher').
- In 1988, Easco raised $100 million through a note offering, stating in its prospectus that the proceeds would be invested in 'government and other marketable securities' pending other uses.
- Contrary to the prospectus, the Easco board, allegedly at the Rales brothers' direction, used over $61.9 million of the proceeds to purchase highly speculative 'junk bonds' from Drexel Burnham Lambert Inc. ('Drexel').
- The alleged motive for the investment was to benefit the Rales brothers' business relationship with Drexel, which was then under investigation and having difficulty selling such bonds.
- The junk bond investments subsequently declined in value, resulting in a loss to Easco of at least $14 million.
- In 1990, Easco merged with Danaher, becoming a wholly-owned subsidiary of Danaher.
- Alfred Blasband, formerly an Easco shareholder, became a Danaher shareholder as a result of the merger.
Procedural Posture:
- Alfred Blasband filed a stockholder derivative action on behalf of Danaher Corporation in the United States District Court for the District of Delaware.
- The District Court dismissed the original complaint based on Blasband's lack of standing.
- Blasband, as appellant, appealed to the United States Court of Appeals for the Third Circuit, which vacated the District Court's order and permitted Blasband to file an amended complaint.
- After Blasband filed an amended complaint, the defendants filed a motion to dismiss and a motion to certify a question of law to the Supreme Court of Delaware.
- The Supreme Court of Delaware accepted the certified question from the District Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is a shareholder's demand on a corporate board excused as futile when the board did not make the challenged business decision, and the shareholder's particularized allegations create a reasonable doubt that a majority of the board could have exercised its independent and disinterested business judgment in responding to a demand?
Opinions:
Majority - Veasey, Chief Justice
Yes. A shareholder's demand on a corporate board is excused as futile when the board did not make the challenged business decision, and the shareholder's particularized allegations create a reasonable doubt that a majority of the board could have exercised its independent and disinterested business judgment in responding to a demand. The two-part test from Aronson v. Lewis applies only when the derivative suit challenges a decision made by the board that would be considering the demand. Because the Danaher board did not approve the challenged junk bond investment (which was made by the pre-merger Easco board), the Aronson test is inapplicable. The proper inquiry is whether a majority of the Danaher board, at the time the complaint was filed, could have impartially considered a demand to bring suit. Here, a majority of Danaher's eight-member board was disabled: the two Rales brothers and director Caplin were 'interested' because they were on the Easco board that made the challenged decision and faced a substantial likelihood of personal liability. Two other directors, Sherman and Ehrlich, were not 'independent' because they were beholden to the Rales brothers for their lucrative employment positions. Because five of the eight directors could not impartially consider a demand, demand is excused.
Analysis:
This case establishes the Rales test, a critical framework for analyzing demand futility in derivative litigation when the board that would consider the demand did not make the challenged business decision. This carves out a significant exception to the well-established Aronson test, applying to common scenarios such as board turnover or, as here, a derivative suit following a merger. By focusing the inquiry on the current board's ability to act, the decision provides a more logical and context-specific standard for these situations. The Rales test clarifies the law and creates a distinct analytical path for plaintiffs, requiring a director-by-director assessment of independence and disinterestedness untethered from the business judgment rule's application to the underlying transaction.
