Note: The Problem with Waste: Delaware's Lenient Treatment of Waste Claims at the Demand Stage of Derivative Litigation
By Jamie L. Kastler. Full text here.
This Note addresses the Delaware courts’ treatment of waste claims at the demand stage of derivative litigation. Recent Delaware opinions indicate that waste is part of the fiduciary duty of good faith. This means that directors are not protected from claims of waste by section 102(b)(7) exculpation clauses in their corporations’ certificates of incorporation. Additionally, the Delaware courts consistently describe waste as the most difficult claim of a violation of a director’s fiduciary duties for plaintiffs to succeed with at trial. Nonetheless, the courts do not universally require waste claims to contain particularized factual allegations at the demand stage. The Delaware courts’ placement of waste under good faith and their lenient approach to waste claims at the demand stage create an opening for plaintiffs. Plaintiffs can currently bypass the exculpation clause protection for directors and succeed in claiming demand futility if they bring a claim of waste, even if the claim contains only minimal factual support.
This Note argues that the Delaware courts should explicitly place waste under the duty of good faith, thereby making waste a nonexculpable claim. To preserve the viability of the demand stage of derivative litigation, the courts should also require particularized factual allegations for claims of waste when determining demand futility. This treatment will maintain the directors’ authority to manage their corporations, allow shareholders to hold directors accountable for irrational business decisions, and potentially alter the corporate culture that contributed to the recent economic crisis.