## Facts

- Atlas Energy Corporation was a Delaware oil-and-gas company controlled by a shareholder/director group holding approximately 52% of its stock.
- The controlling group agreed to transfer its control block to Frederic Mascolo in exchange for shares of Mascolo’s company, Insuranshares of America (ISA).
- The transaction contemplated an immediate shift in board control: the selling directors would resign and ensure Mascolo’s designees were installed as directors.
- Mascolo represented that ISA operated in the insurance business and owned life-insurance subsidiaries, supported by draft financial information.
- Atlas’s chief financial officer raised concerns about the accuracy of ISA’s financial information, but the selling controllers allegedly did not conduct further investigation.
- After obtaining control, Mascolo and his group allegedly caused Atlas to undertake transactions that stripped value, including rebranding, capital changes, a stock-for-stock acquisition of ISA, and steps toward divesting Atlas’s oil properties.
- A minority shareholder sued derivatively on Atlas’s behalf, alleging that the selling controllers’ negligent transfer of control enabled the subsequent looting.

## Issues

1. Whether demand on the board was excused under Court of Chancery Rule 23.1 based on particularized allegations of interest or a substantial likelihood of liability.
2. Whether the complaint stated a claim that controlling shareholders/directors breached a duty of care by failing to investigate a buyer’s bona fides when suspicious circumstances suggested a risk of looting.
3. Whether Delaware had personal jurisdiction over the individual defendants under 10 Del. C. § 3114 for claims arising from their conduct as directors.

## Decision

- Demand was excused as futile under Rule 23.1 because the complaint alleged that directors who would consider demand were implicated in the challenged control transfer and ensuing misconduct.
- The complaint stated a claim against the selling controllers for negligent sale of control where alleged red flags created a duty to take reasonable investigative steps before transferring control.
- Delaware courts had personal jurisdiction over the individual defendants under 10 Del. C. § 3114 because the claims arose from actions taken in their capacities as directors.
- The motions to dismiss were denied, allowing the derivative action to proceed.

## Legal Principles

- A derivative plaintiff must plead particularized facts excusing demand when the board cannot exercise disinterested and independent judgment due to self-interest or a substantial likelihood of liability.
- Controlling shareholders and directors generally may sell control, but they may owe the corporation a duty of care to investigate a proposed buyer when facts known to the sellers would place a prudent person on inquiry about a substantial risk of looting or comparable harm.
- The duty to investigate is not automatic in every control sale; it arises when the buyer is of questionable reliability or when transaction circumstances present meaningful warning signs.
- At the pleading stage, allegations that sellers ignored specific warnings, failed to undertake even basic inquiry, and thereby facilitated later corporate injury can suffice to plead breach and causation.
- Under 10 Del. C. § 3114, individuals who serve as directors of a Delaware corporation consent to Delaware jurisdiction for actions concerning their conduct as directors.

## Conclusion

The court permitted a derivative suit to go forward where the pleadings alleged that directors controlling a corporation transferred control despite concrete warnings suggesting buyer untrustworthiness and a risk of looting, excused demand as futile, and exercised personal jurisdiction over director-defendants under Delaware’s consent statute.


Harris v. Carter, 582 A.2d 222 (Del. Ch. 1990)