## Facts

- A shareholder of Martha Stewart Living Omnimedia, Inc. (MSO) filed a derivative action on MSO’s behalf against Martha Stewart, certain officers, and outside directors.
- MSO’s business depended substantially on the “Martha Stewart” brand and related publishing, television, merchandising, and internet activities.
- The suit followed public controversy, investigations, and later criminal and civil proceedings arising from Stewart’s sale of ImClone stock and subsequent public statements.
- The plaintiff alleged Stewart breached fiduciary duties through illegal trading and through statements that increased reputational and economic harm to MSO, contributing to a stock-price decline.
- The plaintiff filed suit without making a pre-suit demand on MSO’s board and without first pursuing books-and-records inspection.
- At filing, MSO had a six-member board: Stewart; MSO’s president/COO; and four outside directors.
- The plaintiff conceded Stewart was conflicted and alleged a majority of the remaining directors lacked independence due to asserted social and professional ties to Stewart and because directors received stock- and option-based compensation.
- The allegations of non-independence relied largely on press accounts describing directors as “friends,” social acquaintances, or supportive of Stewart in media-related matters.

## Issues

1. Whether the complaint pled particularized facts creating a reasonable doubt that a majority of the board could exercise independent and disinterested business judgment on a demand, excusing demand under Court of Chancery Rule 23.1 and the Rales standard.
2. Whether certain fiduciary-duty and related counts stated a claim under Rule 12(b)(6).
3. Whether the action should be stayed in favor of related federal litigation.

## Decision

- The court applied the Rales demand-futility framework because the alleged misconduct was not a decision of the board.
- The court held the plaintiff failed to plead particularized facts showing that a majority of the board lacked independence or was interested; demand was therefore not excused.
- The derivative action was dismissed under Rule 23.1.
- The court also dismissed certain counts under Rule 12(b)(6) for failure to state a claim.
- Because the action was dismissed, the request to stay the case in favor of federal litigation was mooted.

## Legal Principles

- When the alleged wrongdoing is not a board decision, demand futility is assessed under Rales: whether particularized allegations create a reasonable doubt that, at filing, the board could have properly exercised independent and disinterested business judgment in responding to a demand.
- Directors are presumed independent and acting in good faith; a derivative plaintiff must plead particularized facts to rebut that presumption.
- Conclusory allegations of “friendship,” “social ties,” or routine professional relationships—without facts showing a director is beholden such that discretion is effectively disabled—do not establish lack of independence.
- Stock- and option-based director compensation, without additional facts showing disabling dependence or control, does not by itself create a reasonable doubt as to independence.

## Conclusion

The court dismissed the derivative action because the plaintiff did not plead demand futility with particularity under Rule 23.1; generalized allegations of friendship, social contact, and ordinary stock-based compensation were insufficient to show that a majority of directors could not independently consider a demand.


Beam v. Stewart, 833 A.2d 961 (Del. Ch. 2003)