## Facts

- A minority stockholder of Phillips Petroleum Company filed a stockholder derivative action seeking relief for alleged frauds and wrongdoing by Phillips’s directors and officers.
- The claims centered on dealings between Phillips and Ada Oil Company, in which a defendant director allegedly held a majority interest; the transactions were alleged to have improperly benefited Ada and its controlling insider at Phillips’s expense.
- The complaint pleaded particularized reasons why demand on Phillips’s board would be futile; the sufficiency of those allegations was not contested.
- The plaintiff did not make a pre-suit demand on the stockholders and alleged two main reasons: (1) the action involved “fraud,” which could not be validly ratified by a stockholder majority, and (2) requiring a minority holder to communicate with more than 100,000 stockholders and effectively conduct a proxy contest against management would be oppressive, unreasonable, and futile.
- The defendants moved to dismiss for failure to satisfy the derivative pleading requirement concerning efforts to obtain action from stockholders.
- The trial court dismissed, reasoning that stockholder demand would not necessarily have been futile.

## Issues

1. Under the derivative-suit pleading rule requiring efforts to obtain action from directors and, “if necessary,” from stockholders, when is a pre-suit demand on stockholders required?
2. Whether the plaintiff’s allegations were legally sufficient to excuse the absence of a stockholder demand after director demand was adequately excused as futile.

## Decision

- The Delaware Supreme Court reversed the dismissal and remanded.
- The court held that a stockholder demand is not an automatic prerequisite whenever director demand is excused; the rule requires stockholder demand only when it is “necessary” under the circumstances.
- Given the alleged fiduciary wrongdoing and the practical realities of seeking stockholder action in a company with an extremely large stockholder base, the plaintiff was not required to attempt a costly, large-scale stockholder solicitation as a condition to suit.

## Legal Principles

- In a derivative action, demand on stockholders is required only “if necessary,” and necessity depends on the circumstances alleged.
- The demand requirement is not a mechanical rule designed to force minority stockholders into proxy solicitations whenever directors are conflicted; it serves to encourage feasible intra-corporate remedies without making derivative relief impracticable.
- Practical futility and the realistic availability of stockholder action may excuse stockholder demand, particularly where the alleged wrong involves serious fiduciary misconduct or self-dealing.
- Where stockholders lack effective power to ratify or cure the alleged misconduct, insisting on stockholder demand may be unnecessary.

## Conclusion

The court reinstated the derivative action, holding that the pleading rule did not require a pre-suit stockholder demand on these allegations because such a demand was not “necessary” in light of the claimed fiduciary wrongdoing and the impracticality of obtaining stockholder action through a massive solicitation effort.


Mayer v. Adams, 141 A.2d 458 (Del. 1958)