## Facts

- A shareholder representative brought consolidated derivative and putative class claims against a Delaware-incorporated holding company, its national-bank subsidiary, certain officers and directors, and the outside auditor.
- The complaint alleged corporate “mismanagement and waste” reflected in large losses from: (1) risky, poorly secured lending (including loans tied to Hunt-related entities), (2) acquisition of a Brazilian bank coupled with a deposit guarantee, (3) executive bonuses and incentive compensation despite losses, and (4) weak internal approval and audit controls.
- The pleadings focused on imprudence and inadequate oversight rather than self-dealing; they did not allege directors received personal benefits from the challenged transactions.
- The district court dismissed earlier pleadings for noncompliance with Federal Rule of Civil Procedure 23.1 and later dismissed the operative amended complaint with prejudice for failure to plead demand futility under Delaware law; discovery was stayed.
- The plaintiff appealed, arguing demand should be excused as futile and that she could not plead greater detail without discovery.

## Issues

1. Whether Delaware law required a pre-suit demand on the board before filing the derivative action.
2. Whether the complaint alleged with particularity facts excusing demand as futile by creating reasonable doubt that a majority of directors were disinterested/independent or that the challenged decisions were valid exercises of business judgment.
3. Whether the discovery stay could relax Rule 23.1’s particularized pleading requirement for demand futility.

## Decision

- The Seventh Circuit affirmed dismissal with prejudice.
- Demand was required unless excused, and the complaint failed to plead demand futility with the particularity Rule 23.1 requires.
- General allegations of large losses, recklessness, or waste did not show director interest, lack of independence, bad faith, or a substantial likelihood of personal liability for a board majority.
- The challenged transactions were plausibly consistent with legitimate business judgments, so the pleadings did not rebut business-judgment protection.
- A lack of discovery did not excuse the failure to plead demand futility with particularized facts.

## Legal Principles

- Federal Rule of Civil Procedure 23.1 sets a heightened pleading requirement for derivative actions: the complaint must state with particularity demand efforts or reasons demand was not made.
- The substantive question whether demand is required or excused is governed by the corporation’s state of incorporation; for a Delaware corporation, demand is excused only if well-pleaded facts create reasonable doubt that:
  - the directors are disinterested and independent, or
  - the challenged transaction was a valid exercise of business judgment.
- Conclusory characterizations (e.g., “egregious,” “wasteful,” “reckless”) are insufficient; demand futility must rest on concrete, specific factual allegations.
- Large losses or unsuccessful outcomes, standing alone, do not establish fiduciary breach or demand futility; absent particularized allegations of conflict, bad faith, or grossly uninformed decision-making, courts will not second-guess board decisions.
- Plaintiffs may not use discovery to search for demand-futility facts; demand futility must be adequately pleaded at the outset.

## Conclusion

The court held that the derivative plaintiff was required to make a board demand or plead demand futility with particularized facts under Delaware law and Rule 23.1, and affirmed dismissal with prejudice because the complaint alleged only generalized mismanagement and outcomes consistent with protected business judgment.


Starrels v. First Nat'l Bank of Chi., 870 F.2d 1168 (7th Cir. 1989)