## Facts

- McKesson Corp. and HBOC & Co. merged in January 1999 to form McKesson HBOC, Inc., with a post-merger board composed of six former McKesson directors and six former HBOC directors.
- Before approving the merger, McKesson engaged Deloitte & Touche and Bear Stearns to conduct due diligence; they reviewed HBOC’s books and recommended approval, and the McKesson board approved the transaction.
- After the merger, the company announced accounting problems at HBOC and issued multiple downward revisions/restatements of financial statements for fiscal years 1996–1998, reflecting overstated revenue and earnings attributable to HBOC.
- Stockholders of McKesson HBOC filed a derivative action alleging breaches of fiduciary duty and corporate waste based on (i) inadequate pre-merger investigation, (ii) failures of oversight regarding accounting irregularities, (iii) ignoring alleged “red flags,” and (iv) overpaying for HBOC in the merger.
- Plaintiffs did not make a pre-suit demand on the board, alleging demand futility based on director interest, lack of independence, and exposure to liability.
- The complaint did not allege that McKesson directors had actual knowledge of the accounting problems, distrusted the experts, relied on the experts in bad faith, or that the fraud was obvious such that directors should have detected it themselves.

## Issues

1. Whether plaintiffs pleaded particularized facts excusing pre-suit demand under Delaware Court of Chancery Rule 23.1.
2. Whether plaintiffs had standing to pursue derivative claims for alleged pre-merger breaches by HBOC directors after HBOC ceased to exist as a separate entity following the merger.
3. Whether the pleaded facts stated viable derivative claims for breach of the duty of care, oversight failures, and corporate waste sufficient to show a substantial likelihood of director liability.

## Decision

- The Court of Chancery granted defendants’ motion to dismiss under Rule 23.1 for failure to plead demand futility with the required particularity.
- The court also found plaintiffs lacked standing to pursue at least certain claims premised solely on pre-merger misconduct at HBOC.
- Dismissal was without prejudice, and plaintiffs were granted leave to amend to cure pleading deficiencies.

## Legal Principles

- In a derivative action, demand is excused only if the complaint pleads particularized facts showing a majority of the board is interested, lacks independence, or faces a substantial likelihood of personal liability such that it cannot exercise disinterested business judgment on a demand.
- Conclusory allegations of domination or control are insufficient; Rule 23.1 requires specific facts supporting interest or lack of independence.
- Good-faith reliance on qualified experts (including accountants and investment bankers) supports business judgment protection and undermines claims that directors face a substantial likelihood of liability for duty-of-care purposes, absent well-pleaded facts of bad faith, known deficiencies, or obvious warning signs.
- Oversight liability requires well-pleaded facts showing knowing disregard or a sustained failure to monitor; the later discovery of fraud, without more, does not support an inference of conscious inaction.
- Corporate waste requires a showing that the transaction was so one-sided that no rational business person could view the consideration as adequate; allegations that a deal turned out poorly due to undiscovered fraud generally do not meet that standard.
- After a merger, stockholders generally lose standing to maintain derivative claims belonging to the merged corporation, subject to limited exceptions not adequately pleaded here.

## Conclusion

The court dismissed a post-merger derivative suit challenging board conduct surrounding an accounting-fraud-tainted merger because the complaint did not plead demand futility with particularized facts and did not establish standing for certain pre-merger claims, while allowing plaintiffs an opportunity to amend.


Ash v. McCall, 2000 WL 1370341 (Del. Ch. Sept. 15, 2000)