## Facts

- Easco Hand Tools, Inc. issued senior subordinated notes, with proceeds allegedly intended for safe investments.
- Alfred Blasband alleged that Steven and Mitchell Rales caused Easco to invest the proceeds in speculative junk bonds to benefit a firm with which they had significant business ties, causing substantial losses.
- Easco later became a wholly owned subsidiary of Danaher Corporation; Blasband became a Danaher stockholder and brought a derivative action through Danaher for harm allegedly incurred at Easco.
- Blasband made no pre-suit demand on Danaher’s board and instead pleaded demand futility.
- The federal district court dismissed for lack of standing; the Third Circuit vacated and allowed amendment, describing the action as akin to (but not exactly) a double-derivative suit.
- In connection with a renewed motion to dismiss, the federal court certified to the Delaware Supreme Court whether the amended complaint adequately alleged demand was excused on Danaher’s board.

## Issues

1. In a derivative action where the board asked to consider demand did not make the challenged business decision, what demand-futility standard applies under Delaware law?
2. Whether the amended complaint alleged particularized facts creating reasonable doubt that a majority of Danaher’s board could exercise independent and disinterested judgment on a litigation demand.

## Decision

- The Delaware Supreme Court answered the certified question in the affirmative and held demand on Danaher’s board was excused.
- The court held that when the board considering demand did not make the challenged decision, the proper inquiry is whether the board can impartially evaluate a demand, rather than applying the transactional component of Aronson.
- Applying this standard, the court found the complaint pleaded particularized facts supporting a reasonable doubt that a majority of Danaher’s directors were independent and disinterested, including allegations of:
  - a substantial likelihood of personal liability for the Rales brothers; and
  - significant financial or other ties between certain directors and entities controlled by the Rales brothers.

## Legal Principles

- Demand futility is assessed under Aronson v. Lewis only when the same board that would consider demand made the challenged business decision.
- When no specific board decision is challenged, or the decision was made by a different board, demand is excused if the complaint pleads particularized facts creating a reasonable doubt that a majority of the demand board could have properly exercised independent and disinterested business judgment in responding to the demand (the Rales test).
- A substantial likelihood of personal liability can render a director interested for demand purposes.
- Allegations of substantial financial ties or relationships to an alleged wrongdoer may support a reasonable inference that a director lacks independence at the pleading stage.

## Conclusion

The court held that demand was excused because the complaint pleaded facts supporting reasonable doubt that a majority of Danaher’s board could impartially consider a demand, and it established the Rales test for demand futility when the demand board did not make the challenged decision.


Rales v. Blasband, 634 A.2d 927 (Del. 1993)