Levine v. Smith

These separate shareholder suits, consolidated on appeal, challenge once again the business judgment rule’s application to action of the General Motors Board of Directors which this Court addressed three years ago in Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988) (hereinafter “Grobow /”). The appeals highlight the differing legal standards controlling shareholder standing to pursue derivative claims depending on whether the shareholder asserts a claim of demand futility or wrongful refusal of demand. In the Grobow appeal (hereinafter “Grobow II”), a derivative claim premised on futility of demand, the Grobow plaintiffs again contend that they have now met their burden of pleading, by their “Second Amended Complaint,” particularized facts sufficient to excuse demand. Concurrently, shareholder Morton Levine, appealing the Court of Chancery’s dismissal of his original suit, contends that his Amended Complaint pleads particularized facts sufficient to create a reasonable doubt that the General Motors directors wrongly refused Levine’s presuit demand.

In Grobow II, we hold that plaintiffs’ restated complaint fails to state a claim of demand futility. The Second Amended Complaint fails to plead with particularity facts which would raise a reasonable doubt of director disinterest and independence or that the challenged transaction was otherwise the product of a valid exercise of business judgment. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 814 (1984).

In Levine, we hold that the Amended Complaint fails to allege particularized facts sufficient to create a reasonable doubt that the General Motors outside directors were either manipulated or misled by management or were so uninformed as to fail to exercise due care. We reaffirm the rule that on a Court of Chancery Rule 23.1 motion to dismiss a derivative suit in a case of demand refused, director indepen *198 dence and lack of self-interest is conceded. Therefore, the trial court reviews the board’s decision only for compliance with the traditional business judgment rule. The only relevant question is whether the directors acted in an informed manner and with due care, in a good faith belief that their action was in the best interest of the corporation.

I. PACTS

Each of these derivative suits challenges General Motors Corporation’s (“GM”) repurchase on December 1, 1986 from H. Ross Perot, then GM's largest shareholder, of all his GM Class E stock and contingent notes and those of Perot’s close associates of Electronic Data Systems Corporation (“EDS”), a wholly owned GM subsidiary. The facts underlying this transaction have been previously set forth at length in this Court’s Opinion in Grobow I and in the reported decision of the Court of Chancery from which the Grobow I appeal was taken. Grobow v. Perot, Del.Ch., 526 A.2d 914 (1987), aff'd, Grobow I, 539 A.2d at 180. Therefore, we recite those facts only in a summary fashion, including such other facts as are pertinent to these consolidated appeals.

Both derivative actions are brought on behalf of GM and GM’s wholly owned subsidiary, EDS, which was founded by Perot. The named defendants in both actions are all twenty-one members of GM’s Board of Directors, Perot, and three of Perot’s close EDS associates. In 1984, GM acquired by merger 100 percent of EDS' stock. By the terms of the merger, Perot, then EDS’ chairman and largest shareholder, exchanged EDS stock for cash, GM Class E stock and a contingent note package. The transaction made Perot GM’s largest shareholder with 0.8 percent of GM voting stock. Perot remained chairman of EDS and became a member of the GM Board of Directors. GM and EDS agreed that EDS, although a wholly owned subsidiary of GM, would be allowed to operate with a “substantial degree of autonomy” and would retain “significant control over its internal affairs.”

While the GM-EDS merger proved to be largely successful, numerous disputes arose between GM and Perot regarding the management and operation of EDS. By mid-1986, Perot became increasingly critical of GM management concerning issues involving EDS and unrelated to EDS, including the quality of GM products. Perot’s criticism received wide media attention, with Perot being quoted in Business Week as having criticized GM for “producing second-rate cars.” Perot also believed that GM was not acting in accordance with agreements the parties had reached. By the summer of 1986, Perot made demands upon GM’s chairman that GM either buy him out or else allow him to operate EDS as he saw fit. Perot also threatened to sue GM.

In the fall of 1986, GM and Perot entered into negotiations for GM to repurchase Perot’s interest in GM. This followed an aborted effort by GM to sell EDS to American Telephone and Telegraph. By November 30, 1986, the terms of a definitive agreement had been reached; and on that date, the Oversight Subcommittee of the GM Board’s Audit Committee met to discuss the proposed agreement. The members of the three-person Subcommittee were all outside, non-management directors. Other directors participated in the lengthy meeting, although the full Board was not present. The Oversight Subcommittee unanimously recommended that the GM Board approve the terms of the repurchase. At the time, GM’s twenty-one member Board consisted of but seven inside, or management, directors and fourteen outside directors, excluding Perot. The next day, December 1, the full GM Board (excluding Perot) met and unanimously approved the transaction.

Under the terms of the repurchase transaction, GM purchased all of the GM Class E stock and contingent notes of Perot and Perot’s three close EDS associates for $61.90 per share, including the note package, for a total sum of roughly $742.8 million. Part of the consideration received by GM included Perot’s agreement: not to compete with EDS for three years; not to *199 recruit EDS executives for eighteen months; not to acquire GM stock or engage in a proxy contest for five years; and to refrain from further criticism of GM management.

The Grobow Suit

In December 1986, GM shareholders, Grobow and others (hereinafter “the Gro-bow plaintiffs”), filed three separate derivative actions (later consolidated) against GM, EDS, GM’s directors, Perot, and three of Perot’s EDS associates. As noted above, the suits attacked GM’s December 1, 1986 repurchase transaction. All defendants moved to dismiss the action on the ground that the Grobow plaintiffs had failed to comply with Court of Chancery Rule 23.1 because they neither made a pre-litigation demand on GM’s Board nor pleaded particularized facts demonstrating that such a demand was excused as futile. Following briefing and oral argument, and before decision on defendants’ motion to dismiss, plaintiffs filed an Amended Complaint. Following defendants’ renewal of their motion to dismiss and further briefing, the Court of Chancery granted defendants’ motion and entered judgment dismissing the action on April 13, 1987. Gro-bow, 526 A.2d at 914. Plaintiffs appealed to this Court, and this Court, on March 15, 1988, affirmed the decision below. Grobow I, 539 A.2d at 180.

Within two months, on May 16, 1988, the Grobow plaintiffs moved the Court of Chancery under Rules 60(b)(2) and 15(a) to vacate the Grobow I judgment and for leave to file a second amended complaint on the basis of newly discovered evidence. The newly discovered evidence consisted of the depositions of two of GM’s outside directors obtained in May or June 1987 in a related New York action, and a book published in early 1988 titled Call Me Roger. The Court of Chancery granted in part plaintiffs’ motion on January 9, 1989, and plaintiffs then filed a Second Amended Complaint. The Court of Chancery, by decision dated January 2, 1990, granted defendants’ renewed Rule 23.1 motion and dismissed the Second Amended Complaint. When the Grobow plaintiffs filed the present appeal, defendants filed cross-appeals from the trial court’s January 9, 1989 order granting plaintiffs Rule 60(b) relief and leave to file a second amended complaint.

The Levine Suit

On December 11,1986, ten days after the GM Board’s approval of the Perot repurchase agreement, GM shareholder Levine made written demand upon the GM Board to rescind the Perot repurchase transaction. Levine also requested that the Board allow him to appear and speak in support of his position at its next meeting. Although the Board promised to consider the demand at its next regularly scheduled meeting, it did not hear from Levine in person. On January 5,1987, the GM Board met and voted unanimously to reject demand. GM notified Levine’s counsel on January 9, 1987 that the Board had reviewed the December 11 demand letter and had unanimously decided that legal action would not be “in the best interests of the Corporation.” On February 3, 1987, Levine filed suit in the Court of Chancery; and two months later, the court issued its ruling dismissing the Grobow I suit.

When Levine initiated discovery, GM and its directors moved to dismiss the complaint under Rule 23.1 and for a protective order pending disposition of the motion. Following briefing, limited to defendants’ motion for a protective order, the Court of Chancery, in December 1987, granted defendants’ motion and stayed further discovery. Following defendants’ briefing of their motion to dismiss under Rule 23.1, Levine filed on January 26,1988 an Amended Complaint; and defendants renewed their motion to dismiss. On November 27, 1989, the Court of Chancery granted defendants’ motion and dismissed the Levine Amended Complaint. Levine then docketed this appeal on December 21,1989, after the trial court denied Levine’s request to file a second amended complaint.

Related Federal Litigation

Other GM shareholders filed ten federal court actions challenging the December 1, *200 1986 repurchase transaction for violations of federal securities law and for wrongful refusal of demand. After consolidation of the cases, which include class and derivative claims, and transfer to the District of Delaware, the court dismissed the class claims on September 7,1988 but declined to dismiss the derivative claims. The court found that plaintiffs had adequately pleaded wrongful refusal of demand. In re General Motors Class E Stock Buyout Sec. Litigation, 694 F.Supp. 1119, 1133-34 (D.Del.1988) (motion for reargument pending and proceedings stayed). The GM defendants moved for reargument, and the case was later reassigned to another judge, who stayed consideration of reargument pending this Court’s decision in this appeal.

II

A

Demand Requirements of Rule 23.1

A shareholder derivative suit is a uniquely equitable remedy in which a shareholder asserts on behalf of a corporation a claim belonging not to the shareholder, but to the corporation. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). Under Delaware law, a derivative suit is also a qualified or conditional remedy by reason of its “potential for conflict between the directors’ power to manage the corporation and the shareholders’ power to sue derivatively.” Kaplan v. Peat, Marwick, Mitchell & Co., Del.Supr., 540 A.2d 726, 730 (1988); 8 Del.C. § 141(a). The directors of a corporation and not its shareholders manage the business and affairs of the corporation, Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140, 1150 (1990), and accordingly, the directors are responsible for deciding whether to engage in derivative litigation. Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). “The decision to bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation.” Spiegel v. Buntrock, Del.Supr., 571 A.2d 767, 773 (1990). On the other hand, the directors’ exercise of their managerial power in all its aspects “is tempered by fundamental fiduciary obligations owed by the directors to the corporation and its shareholders.” Kaplan v. Peat, 540 A.2d at 729.

The demand requirements of Rule 23.1 represent a procedural restatement of these bedrock principles of Delaware law of corporate governance in the context of standing to maintain a derivative shareholder’s suit. Tandycrafts, Inc. v. Initio Partners, Del.Supr., 562 A.2d 1162, 1166 (1989). Rule 23.1’s alternative requirements of pleading demand futility or wrongful refusal of demand are designed to strike a balance between a shareholder’s claim of right to assert a derivative claim and a board of directors’ duty to decide whether to invest the resources of the corporation in pursuit of the shareholder’s claim of corporate wrong. Spiegel, 571 A.2d at 773; Aronson, 473 A.2d at 812. Both the requirements of demand futility and wrongful refusal of demand are predicated upon and “inextricably bound to issues of business judgment and the standards of that doctrine’s applicability.” Aronson, 473 A.2d at 812. Thus, the correct application of the business judgment rule is crucial to a determination of the sufficiency of a derivative complaint to withstand a Rule 23.1 motion in both a demand excused and a demand refused context.

B

Standard of

Review — Questions Presented

Our standard of review of the trial court’s formulation of the legal standard controlling defendants’ 23.1 motion to dismiss each of the derivative actions, Grobow II and Levine, is plenary or de novo. See, e.g., Barkan v. Amsted Industries, Inc., Del.Supr., 567 A.2d 1279, 1284 (1989). Assuming no error in the formulation of the appropriate legal standard in each case, our standard of review of the application of the correct legal standard is for abuse of discretion. A decision on a Rule 23.1 motion, whether based on demand excused or demand refused, “involves essentially a discretionary ruling on a predominantly factu *201 al issue.” Grobow I, 539 A.2d at 186. See also Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson, 473 A.2d at 814.

In Grobow II, three questions are presented, of which the first two are related. They are: (1) whether the Court of Chancery erred in granting plaintiffs relief under Rule 60(b) and leave to file a second amended complaint; and, if not, (2) whether the court, having granted such relief, erred in then confining its demand futility analysis to plaintiffs’ claims based on newly discovered evidence. Assuming no error in those rulings, a further question is raised: (3) whether the trial court erred in dismissing plaintiffs’ restated complaint for failure to plead particularized facts sufficient to excuse demand.

In Levine, four questions are presented: (1) whether plaintiff was entitled to limited discovery, as in Zapata, in response to defendants’ Rule 23.1 motion; (2) whether the trial court applied the proper pleading standard for testing the sufficiency of Levine’s Amended Complaint to withstand dismissal under Rule 23.1; (3) whether the trial court applied the correct legal standard for determining the sufficiency of a derivative complaint based on wrongful refusal of demand to withstand a Rule 23.1 motion; and (4) whether the plaintiff complied with Rule 23.1 by pleading particularized facts sufficient to create a reasonable doubt that the GM Board’s refusal of Levine’s demand was protected by the business judgment rule.

Ill

The Grobow II Complaint

A

Plaintiffs’ Claims of “Newly Discovered” Evidence

In Grobow II, the first two questions enumerated above raise related issues. Therefore, we will take up both questions. They are: (1) whether the Court of Chancery erred in granting the plaintiffs leave to file a second amended complaint; and (2) if not, whether the court erred in confining its demand futility analysis of the Grobow Second Amended Complaint to plaintiffs’ claims based on newly discovered evidence. Defendants assert that the Court of Chancery erred in granting plaintiffs leave to file a second amended complaint. Plaintiffs assert that the trial court erred in limiting its Rule 23.1 demand analysis to plaintiffs’ newly discovered evidence claims. Both claims of error arise from the trial court’s interlocutory order granting plaintiffs relief under Rule 60(b) and leave to file a second amended complaint based on plaintiffs’ claim of “newly discovered evidence.”

As previously noted, on May 16, 1988, two months after this Court’s decision in Grobow I, plaintiffs filed motions in the Court of Chancery both to vacate the judgment in Grobow I dismissing plaintiffs’ suits and for leave to file a second amended complaint. Plaintiffs’ motions were filed under Court of Chancery Rules 60(b)(2) and Rule 15(a). Plaintiffs’ “newly discovered evidence” consisted of: (1) the deposition testimony of two of GM’s outside directors, James H. Evans and Thomas H. Wyman, obtained by the Grobow plaintiffs in May or June 1987, which was taken by other litigants in a related New York State court action; 1 and (2) disclosures of “important and relevant facts” contained in a book titled Call Me Roger, published in early 1988. 2

In seeking Rule 60(b) relief, plaintiffs argued that the “newly discovered evidence” constituted material evidence that would satisfy the pleading requirements of Rule 23.1 for demand futility. That evidence was that GM’s outside directors were misled about key provisions and consequences of the Perot buy-out and that the GM Board’s approval of the buy-out was obtained in a hasty and ill-informed, and therefore grossly negligent, manner. Plaintiffs so alleged in a proposed Second *202 Amended Complaint, which also restated all of plaintiffs’ original claims which had been pleaded in Grobow I.

On November 25, 1988, the trial court, over defendants’ objections, granted plaintiffs relief under Rule 60(b) and leave to file the Second Amended Complaint. A dispute then arose between the parties over whether the court’s order should simply “open” the Grobow I judgment, as defendants contended, or should “vacate” the judgment, as plaintiffs contended; and the court concluded that the “prudent course” was to “leave the issue undecided for the present, yet allow the litigation to proceed.” 3

Defendants contend that the Court of Chancery erred in granting plaintiffs leave to file the Second Amended Complaint. They base their argument for reversal primarily upon plaintiffs’ concession that they had knowledge of the “newly discovered evidence” while they prosecuted their appeal of Grobow I before this Court. It appears to be undisputed that plaintiffs were in possession of most, if not all, of this evidence: at least one month before plaintiffs filed their opening brief on appeal in Grobow I; at least six months before oral argument before this Court in Grobow I; and at least nine months before this Court issued its decision in Grobow I on March 15, 1988. Defendants argue that plaintiffs’ withholding of this evidence obviously reflected a “tactical decision” to await the outcome of Grobow I, and that plaintiffs’ pursuit of their Grobow I appeal, without disclosing either to this Court or to the Court of Chancery this “newly discovered evidence,” should bar plaintiffs’ claim for Rule 60(b) relief.

The trial court rejected defendants’ contention that plaintiffs’ Rule 60(b) application was untimely because deliberately delayed to await the outcome of this Court’s decision in Grobow I. The court reasoned:

If plaintiffs[’] appeal had fully succeeded, then no Rule 60(b) motion would be required. Even if the appeal were unsuccessful, an affirming opinion might provide useful guidance in any further proceedings in this case, as well as in future, cases. To hold that the plaintiffs were equitably compelled to forego their right to prosecute a Rule 60(b) motion as a condition to preserving their appellate remedy in this case, where the complaint had been dismissed at the very threshold and without discovery, would, in my opinion, be unreasonable and unfair.

Delaware law on standards governing the grant or denial of a Rule 60(b)(2) motion is well settled. An applicant seeking relief “from a final judgment, order or proceeding [on the grounds of] newly discovered evidence” must show that:

the newly discovered evidence has come to his knowledge since the trial; that it could not, in the exercise of reasonable diligence, have been discovered for use at the trial; that it is so material and relevant that it will probably change the result if a new trial is granted; that it is not merely cumulative or impeaching in character; and that it is reasonably possible that the evidence will be produced at the trial.

In re Missouri-Kansas Pipe Line Co., Del.Supr., 2 A.2d 273, 278 (1938) (citations omitted). These standards have long been the law of Delaware. See, e.g., Poole v. N. V. Deli Maatschappij, Del.Ch., 257 A.2d 241, 243 (1969); Kennedy v. Emerald Coal & Coke Co., Del.Supr., 42 A.2d 398, 404 (1944) (both cases quoting In re Missouri). But cf. Bachtle v. Bachtle, Del.Supr., 494 A.2d 1253, 1255-56 (1985) (holding that in order to qualify as newly discovered evidence, the evidence must have been “in existence and hidden at the time of judgment”) (quoting Ryan v. United States Lines Co., 303 F.2d 430, 434 (2d Cir.1962)).

In granting plaintiffs relief from the judgment, the trial court ruled: “On the basis of the limited record before me, I *203 cannot conclude as a matter of law that the new evidence, as reflected in the proposed amended pleading, would not change the outcome on a renewed motion to dismiss under Rule 23.1.” Defendants’ cross-appeal of the ruling is not for error of law in applying the standards, but for abuse of discretion in not finding the relief time barred. Defendants assert that plaintiffs’ tactical delay in presenting their new evidence to the trial court, or to this court while the appeal of Grobow I was pending, should bar recourse to Rule 60(b).

We disagree with the trial court’s finding that plaintiffs acted “appropriately” in awaiting the outcome of this Court’s decision in Grobow I before seeking Rule 60(b) relief. Plaintiffs’ delay in seeking relief deviated from federal practice governing the disclosure of material evidence discovered pending an appeal. An appellant seeking relief from a judgment on the basis of newly discovered evidence should promptly apply for relief to the court which entered the judgment. “If the [trial] court indicates that it will allow the motion the [appellate court] should then be requested to remand the cause.” Egger v. Phillips, 710 F.2d 292, 329 (7th Cir.1983) (quoting Binks Mfg. Co. v. Ransburg Electro-Coating Corp., 281 F.2d 252, 260 (7th Cir.1960), cert. dismissed, 366 U.S. 211, 81 S.Ct. 1091, 6 L.Ed.2d 239 (1961)), cert. denied, 464 U.S. 918, 104 S.Ct. 284, 78 L.Ed.2d 262 (1983). See also 11 C. Wright & A. Miller, Federal Practice and Procedure § 2873, at 263-66 (1973 & Supp.1990). While Delaware precedent is less well developed, it is no different. Star Pub. Co. v. Martin, Del.Supr., 95 A.2d 465, 468-69 (1953) (“If [the appellate court] reaches the conclusion that the judgment would probably be reversed in the lower court because of these newly found facts, the appellate court will remand.”). See Schmeusser v. Schmeusser, Del.Supr., 559 A.2d 1294, 1296 (1989) (appeal stayed pending remand to trial court for determination of an issue not previously heard).

The likely result of a party’s failure to promptly invoke a Rule 60(b) claim while an appeal is pending is that the appellate court may render an advisory opinion or decide an issue that is arguably moot or upon an outdated factual record. Stroud v. Milliken Enterprises, Inc., Del.Supr., 552 A.2d 476, 480 (1989). “Whenever a court examines a matter where facts are not fully developed, it runs the risk not only of granting an incorrect judgment, but also of taking an inappropriate or premature step in the development of the law.” Id. at 480. Judicial resources may not be squandered for academic exercises. See id. at 479-480.

While there is no time limit on the filing of a Rule 60(b) motion, Swann v. Carey, Del.Supr., 272 A.2d 711, 712 (1970), plaintiffs were under an obligation “to act without unreasonable delay.” Schremp v. Marvel, Del.Supr., 405 A.2d 119, 120 (1979). The question becomes whether plaintiffs’ apparent decision to await the outcome of Grobow I before seeking relief from the judgment below was so unreasonable as to foreclose relief. The court found plaintiffs to have pursued their appeal in good faith and not to have “behaved inequitably.” Our standard of review of the question presented and the court’s findings is not whether we would have reached the same result as the trial court, but whether the court’s ruling is based on conscience and reason as opposed to eapriciousness or arbitrariness. Chavin v. Cope, Del.Supr., 243 A.2d 694, 695 (1968); Pitts v. White, Del.Supr., 109 A.2d 786, 788 (1954). Applying this standard, we decline to find the trial court to have abused its discretion in granting plaintiffs leave to file a Second Amended Complaint.

We turn to plaintiffs’ assertion that the trial court erred in confining its demand futility analysis of the Grobow Second Amended Complaint to plaintiffs’ claims based on newly discovered evidence. Plaintiffs contend that the court erred as a matter of law and abused its discretion in refusing to reconsider their “newly developed” allegations of waste, self-interest and entrenchment as well as plaintiffs’ newly stated claims that the GM outside directors failed to exercise due care. The premise for their contention is their construction of the record that the trial court’s grant to plaintiffs of relief under Rule *204 60(b) for the purpose of filing a Second Amended ■ Complaint was unconditional. Therefore, plaintiffs argue, their Second Amended Complaint had the legal effect of superseding and rendering null and void all prior pleadings, including the Rule 23.1 rulings of the trial court in Grobow I, and presumably of this Court as well. The Court of Chancery’s asserted error was in failing to treat the entire Second Amended Complaint as a tabula rasa, which would require it to reapply its demand futility analysis under Rule 23.1 to all repleaded claims.

A court has broad authority, as well as discretion, in fashioning the terms of an order granting relief from judgment under Rule 60(b). 7 J. Moore & J. Lucas, Moore’s Federal Practice ¶ 60.19, at 60-166 (2d ed. 1990). Plaintiffs do not dispute this proposition. Instead, they contend that because the trial court’s Rule 60(b) order granting plaintiffs relief and leave to file their amended complaint failed to include any conditions, they were entitled as a matter of law under the liberal precepts of Rule 15(a) to start afresh in amending their complaint.

We find plaintiffs’ argument for converting a clearly discretionary matter into a claim of error of law specious and disingenuous. A court’s broad discretionary authority to determine the scope of relief to be granted under Rule 60(b) clearly extends to the framing of the issues to be relitigated. The standard of abuse of discretion controls both a review of the trial court’s grant of Rule 60(b) relief and the extent of the relief granted.

The record also rebuts plaintiffs’ claim of surprise at the trial court’s imposition of “retroactive conditions” on their new complaint by limiting the renewed issues of demand futility to the newly discovered evidence. The dispute over whether a case for grant of Rule 60(b) relief had been stated, as well as the breadth of the relief to be granted, extended over an eight month period. The record is also clear that the focus of the Rule 60 claim was the issues raised by the “newly discovered evidence.” That is patently clear from the court’s November 25, 1988 decision:

The defendants first argue that the plaintiffs’ new evidence does not constitute ‘newly discovered evidence,’ because it is not ‘... so material and relevant that it would probably change the result,’ as required by Chancery Rule 60(b)(2).

⅝ ⅜! ⅜! % ⅜ ‡

On the basis of the limited record before me, I cannot conclude as a matter of law that the new evidence, as reflected in the proposed amended pleading, would not change the outcome on a renewed motion to dismiss under Rule 23.1. The deposition testimony of the two outside GM directors was taken in the Mart actions in May and June, 1987, i.e., after this litigation had been dismissed. That testimony forms the basis of new allegations — not pleaded in the prior (dismissed) complaint — that GM’s outside directors were misled about certain key provisions and consequences of the Perot buy out, and that GM’s Board approved the buyout in a hasty, ill-informed, and therefore grossly negligent manner.

Plaintiffs’ claim of surprise also cannot be squared with the parties' ensuing dispute over the appropriate form of order to be entered on the trial court’s decision. Plaintiffs contended that the Grobow I judgment should be “vacated”; defendants argued that the judgment should, at most, be “opened.” The court’s decision to enter a form of order which left that issue “undecided for the present” belies plaintiffs’ claim of surprise, unfairness and retroac-tivity in the court’s ultimate decision to limit its demand futility analysis to the newly discovered evidence claims. The court’s failure to resolve the issue a year earlier was, admittedly, a mistake. The court saw its mistake when plaintiffs first asserted their “tabula rasa” argument. The court then explicitly disavowed any earlier intent:

to allow the plaintiffs to replead and reargue legal theories and arguments previously advanced, or to plead variants of those theories that could have been, but were not, previously alleged and ar *205 gued, in connection with the earlier Rule 23.1 dismissal motion. Manifestly the plaintiffs could not have achieved that result if they had filed a new action, because they would have been barred by the doctrine of res judicata.

* * * * * *

Essentially the Court here granted the plaintiffs leave to file a new complaint, subject to the condition that only those claims that were based upon newly discovered evidence — the only rationale for granting Rule 60(b) relief at all — would be cognizable. To allow the plaintiffs to convert their newly amended complaint into a vehicle to reallege and reargue earlier pleaded claims or theories (or to assert theories or claims that could have been, but were not, alleged and argued at that earlier stage), would run counter to that rationale and defeat the very purpose for granting the Rule 60(b) remedy.

On this record the trial court cannot be fairly charged with imposing retroactive conditions on its grant of Rule 60(b) relief. We also find no merit to plaintiffs’ contentions that the Court of Chancery abused its discretion in limiting its second demand futility analysis to plaintiffs’ claims based on newly discovered evidence. Any other ruling would have been untenable, as it would have rendered two courts’ reviews of plaintiffs’ prior claims of demand futility, based on director self-interest, entrenchment and claims of waste, academic exercises, and rendered plaintiffs’ efforts an abuse of the derivative process and Rule 60(b).

B

Whether Plaintiffs’ New Complaint Establishes Futility of Demand

We take up the remaining question in Grobow II: whether the Court of Chancery correctly ruled that plaintiffs’ claims based on newly discovered evidence were insufficient to establish the futility of a demand so as to require the dismissal of plaintiffs’ Second Amended Complaint under Rule 23.1. Court of Chancery Rule 23.1 provides, in pertinent part:

The complaint [shall] ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort.

As we stated at the outset (see supra IIA), the demand requirements of Rule 23.1 are predicated upon the application of the business judgment rule in the context of a board of directors’ exercise of its managerial power over a derivative claim. In determining the sufficiency of a complaint to withstand dismissal under Rule 23.1 based on a claim of demand futility, the controlling legal standard is well established. The trial court is confronted with two related but distinct questions: (1) whether threshold presumptions of director disinterest or independence are rebutted by well-pleaded facts; and, if not, (2) whether the complaint pleads particularized facts sufficient to create a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment. See Grobow I, 539 A.2d at 187-188; Aronson, 473 A.2d at 814-815; Zapata, 430 A.2d at 782-784.

The premise of a shareholder claim of futility of demand is that a majority of the board of directors either has a financial interest in the challenged transaction or lacks independence or otherwise failed to exercise due care. Grobow I, 539 A.2d at 186, 188; Aronson, 473 A.2d at 814. On either showing, it may be'inferred that the Board is incapable of exercising its power and authority to pursue the derivative claims directly. When lack of independence is charged, a plaintiff must show that the Board is either dominated by an officer or director who is the proponent of the challenged transaction or that the Board is so under his influence that its discretion is “sterilize[d].” Zapata, 430 A.2d at 784 (quoting McKee v. Rogers, Del.Ch., 156 A. 191, 193 (1931)); Sohland v. Baker, Del.Supr., 141 A. 277 (1927).

Assuming a plaintiff cannot prove that directors are interested or otherwise *206 not capable of exercising independent business judgment, a plaintiff in a demand futility case must plead particularized facts creating a reasonable doubt as to the “soundness” of the challenged transaction sufficient to rebut the presumption that the business judgment rule attaches to the transaction. The point is that in a claim of demand futility, there are two alternative hurdles, either of which a derivative shareholder complainant must overcome to successfully withstand a Rule 23.1 motion.

In addressing plaintiffs’ restated claim of demand futility, the Vice Chancellor correctly limited his threshold analysis to the issue of director independence. We decline to revisit plaintiffs’ repleaded allegation that the GM Directors, in approving the Perot buy-out, acted out of motives of entrenchment or financial self-interest. We also decline to reconsider plaintiffs’ allegations that the buy-out represented a waste of corporate assets. We fully addressed those issues in Grobow I, 539 A.2d at 188-191; and, as we have already ruled, those issues were clearly not the basis upon which the Vice Chancellor premised the grant of Rule 60(b) relief.

Plaintiffs’ remaining allegations, offered to sustain a claim of demand futility, are that the GM outside directors lacked independence because they were deceived or misled by management or inside directors concerning the true purpose of the Perot buy-out and the substantial progress that had been made in resolving the ongoing disputes between GM and EDS. Plaintiffs claim that the GM outside directors were so manipulated, misinformed and misled that they were subject to management’s control and unable to exercise independent judgment. Plaintiffs assert that their restated complaint pleads with sufficient particularity the manner in which the GM outside directors, though they comprise the majority of the Board, were dominated and controlled by its management directors. As a result, plaintiffs allege that the outside directors’ “independence was thereby destroyed and they were effectively dominated by the management directors.” 4

The Court of Chancery found that plaintiffs’ restated claim of demand futility failed to plead particularized facts sufficient to create a reasonable doubt as to the independence of a majority of the GM Board. The court found that plaintiffs’ claims based on newly discovered evidence implicated, at most, only two of GM’s fourteen outside directors, thereby leaving at least twelve of the twenty-one directors (excluding Perot) independent and “capable of impartially considering a demand.” The court also