## Facts

- Municipal Mortgage & Equity, LLC (MME) was a Delaware LLC with a ten-member board, including two inside directors.
- MME’s operating agreement broadly exculpated and indemnified directors and officers from liability to the company or equityholders “except in the case of fraudulent or illegal conduct.”
- An equityholder filed a derivative action on behalf of MME without making a pre-suit demand on the board.
- The complaint alleged the directors breached fiduciary duties by: (1) improperly valuing non-performing assets and causing false financial statements in violation of internal policies, GAAP, and SEC standards (including FAS 115); (2) authorizing improper charitable contributions, including related-party transactions; and (3) causing misleading SEC disclosures and ignoring “red flags” signaling wrongdoing or regulatory issues.
- The complaint also asserted that audit committee membership supported an inference that certain directors knew of, or acted in bad faith regarding, the alleged accounting and disclosure violations.
- Defendants moved to dismiss under Court of Chancery Rule 23.1 for failure to make demand and failure to plead demand futility with particularized facts.
- The Court of Chancery dismissed; the plaintiff appealed.

## Issues

1. Whether the complaint pleaded particularized facts under Court of Chancery Rule 23.1 sufficient to excuse pre-suit demand as futile.
2. How an operating agreement provision limiting director liability to “fraudulent or illegal conduct” affects the “substantial likelihood of liability” analysis for director interest in the demand-futility inquiry.
3. Whether allegations of GAAP/SEC violations, “red flags,” and audit committee membership, without more, support a reasonable inference of non-exculpated (fraudulent or illegal) director conduct.

## Decision

- The Delaware Supreme Court affirmed dismissal of the derivative action.
- The court held the plaintiff failed to plead particularized facts showing a majority of directors faced a substantial likelihood of personal liability for conduct falling within the operating agreement’s “fraudulent or illegal conduct” exception.
- Generalized assertions of accounting improprieties and misleading disclosures did not support an inference that directors acted with knowing misconduct, bad faith, fraud, or illegality.
- Audit committee membership, standing alone, did not create a reasonable inference of culpable knowledge or bad faith.
- Allegations that directors ignored “red flags” were conclusory because they did not plead specific facts showing board-level awareness of concrete warnings and conscious inaction.

## Legal Principles

- Under Court of Chancery Rule 23.1, a derivative plaintiff must either make a pre-suit demand or plead with particularity why demand is excused.
- Demand is excused only if particularized facts create reasonable doubt that directors could have exercised independent and disinterested business judgment in responding to a demand.
- Where an operating agreement exculpates directors from monetary liability except for fraudulent or illegal conduct, demand futility based on director interest requires particularized facts supporting a reasonable inference of non-exculpated conduct.
- Allegations consistent with duty-of-care failures (including oversight deficiencies) do not establish a substantial likelihood of liability when such claims are exculpated.
- Committee membership and references to “red flags” are insufficient without particularized facts showing what information was presented to directors, their awareness of its significance, and conscious disregard of known risks or violations.

## Conclusion

The court upheld dismissal because the derivative complaint did not plead particularized facts showing that most directors faced non-exculpated personal liability under an operating agreement limiting liability to fraudulent or illegal conduct, and thus did not establish demand futility under Rule 23.1.


Wood v. Baum, 953 A.2d 136 (Del. 2008)