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Case Brief: Shareholder Derivative Suit – DryShips, Inc.
April 2, 2013
In its October 5, 2011 opinion, the Marshall Islands Supreme Court affirmed the decision of the Marshall Islands High Court in a derivative suit whereby the Plaintiff, shareholder of DryShips, Inc. (a Marshall Islands corporation headquartered in Athens, Greece), sued the Board of Directors dismissing Plaintiff’s amended complaint. Plaintiff alleged that Defendants breached their fiduciary duty of good faith, committed waste by approving transactions that were not the product of good faith business judgment, and were unjustly enriched at DryShips’ expense. Plaintiff, however, did not make a demand on the DryShips Board before instituting the action against Defendants.
In the amended complaint, Plaintiff asserted that any such demand would have been “futile and useless … because the Board is incapable of making an independent and disinterested decision to institute and vigorously prosecute this action.” Absent a demand on the Board, Defendants moved the High Court to dismiss the amended complaint. The High Court agreed with Defendants and dismissed the amended complaint, concluding that it did “not contain particularized allegations that raise a reasonable doubt that at the time the lawsuit was filed a majority of the directors were disinterested and independent or that the challenged transactions were the product of a valid exercise of business judgment.” Although Plaintiff was permitted to move for leave to amend the amended complaint, he chose to appeal the High Court’s decision.
Applying Delaware law as required by the Marshall Islands Revised Code (52 MIRC, Part I, § 13), the Supreme Court affirmed dismissal of the amended complaint concluding that Plaintiff did not meet the two-part test for demand futility set forth in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), overruled in part on other grounds by Brehm v. Eisner, 746 A.3d 244 (Del. 2000). Under that test, courts “must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Aronson, 473 A.2d at 814.