## Facts

- A JPMorgan shareholder brought a derivative action after substantial trading losses in the bank’s Chief Investment Office’s London unit (the “London Whale” incident).
- The shareholder submitted a litigation demand asking the board to investigate and pursue claims concerning (1) alleged risk-management failures leading to the losses and (2) alleged misleading public statements by senior executives about the trades and losses.
- The board, using a committee and outside advisors, conducted an investigation (including interviews, document review, and regulator engagement) and decided not to sue, citing corporate-interest considerations such as cost, burden, and litigation prospects.
- The board instead adopted remedial steps, including management and staffing changes, compensation actions, and strengthened oversight and risk controls.
- The shareholder sued, alleging the demand refusal was wrongful because the board’s investigation was impermissibly narrow, focusing on the trading conduct while inadequately investigating executives’ subsequent alleged misstatements.
- The district court dismissed the complaint for failure to plead particularized facts overcoming the business-judgment protection afforded to a board’s demand refusal under Delaware law.

## Issues

1. What is the proper appellate standard of review for a Rule 12(b)(6) dismissal of a derivative complaint challenging a board’s refusal of a shareholder demand: abuse of discretion or de novo?
2. Under Delaware demand-refusal doctrine, what factors govern whether a board acts with gross negligence by limiting the scope of its investigation to the underlying wrongdoing when the demand also targets later officer misstatements?

## Decision

- The court withdrew its prior approach applying abuse-of-discretion review and held that de novo review applies to Rule 12(b)(6) dismissals predicated on demand refusal.
- The court concluded that Delaware law did not clearly resolve how to evaluate a plaintiff’s attack on the scope (as opposed to independence, good faith, or basic process) of a demand-refusal investigation.
- The court certified to the Delaware Supreme Court a question asking what factors a court should consider when a demand covers both underlying wrongdoing and subsequent misstatements, but the board focuses its investigation only on the underlying wrongdoing.
- Proceedings were stayed pending the Delaware Supreme Court’s response, with the federal court retaining jurisdiction.

## Legal Principles

- Appellate review of a Rule 12(b)(6) dismissal is de novo, including when the dismissal rests on Delaware demand-refusal doctrine.
- By making a demand, a stockholder generally concedes the board’s independence and disinterestedness; the refusal is protected by the business judgment rule unless the plaintiff pleads particularized facts showing wrongful refusal.
- A demand-refusal decision by an independent board or committee may be set aside only on particularized facts supporting an inference of bad faith, lack of loyalty, or a duty-of-care breach amounting to gross negligence.
- Whether an investigative scope choice is grossly negligent under Delaware law is a circumstance-dependent inquiry appropriate for authoritative state-law clarification when unsettled.

## Conclusion

The Second Circuit held that demand-refusal dismissals are reviewed de novo and, finding uncertainty in Delaware law on challenges to the scope of a demand-refusal investigation, certified a state-law question on when limiting an investigation to underlying misconduct could constitute gross negligence.


Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, 797 F.3d 229 (2d Cir. 2015)