Grimes v. Donald

In this appeal we address the following issues: (1) the distinction between a direct claim of a stockholder and a derivative claim; (2) a direct claim of alleged abdication by a board of directors of its statutory duty; (3) when a pre-suit demand in a derivative suit is required or excused; and (4) the consequences of demand by a stockholder and the refusal by the board to act on such a demand.

We hold that the Court of Chancery correctly dismissed this stockholder action for the failure to state a claim upon which relief can be granted where the plaintiff stockholder: (a) asserted a direct claim that the directors abdicated their statutory duty to manage or direct the management of the business and affairs of the corporation by entering various employment contracts (the “Agreements”) with the chief executive officer (“CEO”) providing that the CEO “shall be responsible for the general management of the affairs of the company” and further providing that the CEO can declare a constructive termination of the Employmeht Agreement for “unreasonable interference” by the Board with the CEO; (b) made a pre-suit demand on the Board to abrogate the Agreements, the demand was refused, and the stockholder thereafter sought to assert other legal theories relating to the Agreements, arguing that demand was excused.

We hold as follows: First, an abdication claim can be stated by a stockholder as a direct claim, as distinct from a derivative claim, but here the complaint fails to state a claim upon which relief can be granted. Second, when a stockholder demands that the board of directors take action on a claim allegedly belonging to the corporation and demand is refused, the stockholder may not thereafter assert that demand is excused with respect to other legal theories in support of the same claim, although the stockholder may have a remedy for wrongful refusal or may submit further demands which are not repetitious.

Accordingly, on the state of this record, we AFFIRM the dismissal of this action by the Court of Chancery.

I. The Facts

C.L. Grimes (“Grimes”), plaintiff below-appellant, appeals from the dismissal, for failure to state a claim, of his complaint against James L. Donald (“Donald”) (the CEO) and the Board of Directors (the “Board”) of DSC Communications Corporation (“DSC” or the “Company”). Grimes seeks a declaration of the invalidity of the Agreements between Donald and the Company. He also seeks an award of damages against Donald and other members of the Board. He alleges that the Board has breached its fiduciary duties by abdicating its authority, failing to exercise due care and committing waste.

The following facts have been drawn from the face of the complaint. The Company is a Delaware corporation headquartered in Plano, Texas, a suburb of Dallas. The Company, whose shares are traded on the Nasdaq National Market System, designs, manufactures, markets and services telecommunication systems.

The Agreements, executed during 1990, are the focus of the complaint. The Employment Agreement provides that Donald “shall be responsible for the general management of the affairs of the company ...,” and that Donald “shall report to the Board.” The *1211 Employment Agreement runs until the earlier of Donald’s 75th birthday or his termination (1) by reason of death or disability; (2) for cause; or (3) without cause. Under the Employment Agreement, Donald can declare a “Constructive Termination Without Cause” by the Company of his employment as a result of, inter alia, “unreasonable interference, in the good-faith judgment of ... [Donald], by the Board or a substantial stockholder of the Company, in [Donald’s] carrying out his duties and responsibilities under the [Employment] Agreement.” A Constructive Termination Without Cause takes effect after delivery of notice by Donald and the failure by the Board to remedy such interference.

In the event of a Termination Without Cause, constructive or otherwise, Donald is entitled to the following:

1. Continued payment of his “Base Salary” at the level in effect immediately prior to termination for the remainder of his “Term of Employment,” which, as stated, will be &h years unless Donald dies or turns 75 first. In 1992, Donald’s Base Salary exceeded $650,-000.

2. Annual incentive awards for the remainder of the Term of Employment equal to the average of the three highest annual bonuses awarded to Donald during his last ten years as CEO. In 1992, such award allegedly equaled $300,000.

3. Medical benefits for Donald and his wife for life, as well as his children until the age of 23.

4. Continued participation in all employee benefit plans in which Donald is participating on the date of termination until the earlier of the expiration of the Term of Employment or the date on which he receives equivalent benefits from a subsequent employer.

5. Other (unidentified) benefits in accordance with DSC’s plans and programs. See Am.Cplt.Ex. 1 § 11(d).

Grimes v. Donald, Del.Ch., 20 Del.J.Corp.L. 757, 765, 1995 WL 54441 (1995).

The Income Continuation Plan provides, inter alia, that after Base Salary payments cease under the Employment Agreement, Donald is entitled to receive, for the remainder of his life, annual payments equal to the average of the sum of his Base Salary plus bonuses in the three highest years, multiplied by 3%, multiplied by his years of service. Donald has also been awarded 200,000 “units” under the Long Term Incentive Plan. In the event of a Change of Control, as defined in the Incentive Plan, Donald will have the right to cash payments for his units, which Grimes alleges could total $60,000,000 at the stock price in effect at the time the complaint was filed.

As required by Court of Chancery Rule 23.1, Grimes alleges in his complaint that he wrote to the Board on September 23, 1993 and demanded that the Board abrogate the Agreements. The demand letter states, in part:

Paragraph 2(c) of the Employment Agreement dated as of January 1, 1990, between the Company and Mr. Donald purports to vest in Mr. Donald “the general management of the affairs of the Company.” Under Paragraph l(f)(vii) of the Employment Agreement, Mr. Donald is deemed to have been constructively terminated without cause, if there is “unreasonable interference, in the good-faith judgment of [Mr. Donald], by the Board or a substantial stockholder of the Company, in [Mr. Donald’s] carrying out his duties and responsibilities under the Agreement.”

Paragraph l(f)(vii), therefore, purports to put Mr. Donald in a position unilaterally to declare a “constructive termination without cause” whenever he declares that the Board has “unreasonably interfered” with his general management of the affairs of the Company. Other provisions, including, without limitation, Paragraphs 11(d) and 27 of the Employment Agreement and Paragraph 4(b) of the DSC Communications Corporation Executive Income Continuation Plan dated as of January 1, 1990, between the Company and Mr. Donald, would impose drastic costs and burdens on the Company in the event of such a “constructive termination without cause.”

*1212 The effect of the cited provision is to delegate the duties and responsibilities of the Board of Directors to Mr. Donald. This delegation is contrary to law and inconsistent with the certificate of incorporation and bylaws of the Company.

* Jjs * * * *

The cited provisions of the Employment Agreement are therefore void as a matter of law. Although they are void, they should be abrogated so as to leave no cloud upon the lawful conduct of the Company’s affairs. And it should go without saying that the Board must refrain from conducting the business of the Company as if they were valid.

[[Image here]]

Accordingly, I hereby demand that the Board of Directors take immediate steps to abrogate Paragraphs l(f)(vii) and 2(c) of the Employment Agreement dated as of January 1, 1990, between the Company and James L. Donald, and the 1990 Long-Term Incentive Compensation Plan insofar as it applies to Mr. Donald.

The Board refused the demand in a letter dated November 8, 1993, which states in part:

The Compensation Committee of our Board of Directors, as well as the entire Board, have seriously considered the issues set forth in your letter of September 29. To assist in the review, the Board obtained reports analyzing the relevant issues from the Company’s outside benefits consultant, Hirschfeld, Stem, Moyer & Ross, Inc. and from the Company’s outside legal counsel, Jones, Day, Reavis & Pogue. The Compensation Committee and the full Board of Directors believe that a thorough analysis of the applicable provisions of Delaware law necessarily leads to a conclusion that Mr. Donald’s duties as described in the Employment Agreement do not constitute an impermissible delegation of the duties of the Board of Directors.

# * * * * *

Accordingly, the provisions relating to the Board’s actions set forth in Sections 11(d) and l(f)(vii) of the Employment Agreement simply relate to the consequences of the Board’s unreasonable interference with Mr. Donald’s properly delegated duties. These provisions do not limit the Board’s right to guide the Company through the formulation of policy or its right to take any other action it desires to take. They simply represent the agreement between the Company and Mr. Donald regarding the circumstances that will create a constructive termination of his employment and the consequences of such an event.

Based on the foregoing, the Board has concluded that the description of Mr. Donald’s duties in the Employment Agreement do not constitute an impermissible delegation of the duties of the Board of Directors. Consequently, the Board declines to take any action to abrogate any provision of the Employment Agreement or the 1990 Long-Term Incentive Compensation Plan as you have requested.

II. Grimes Has Not Stated a Claim for Abdication of Directorial Duty.

Despite the fact that Grimes demanded that the Board abrogate the Agreements and his demand was refused, the Court of Chancery declined to review the Board’s decision to refuse the demand under the business judgment rule, stating:

Whether these contracts do violate Section 141 is a question of law directly concerning the legal character of the contract and its effect upon the directors. The question whether these contracts are valid or not does not fall into the realm of business judgment; it cannot be definitively determined by the informed, good faith judgment of the board. It must be determined by the court.

Grimes, 20 Del.J.Corp.L. at 771 (citing Blasius Indus., Inc. v. Atlas Corp., Del.Ch., 564 A.2d 651, 663 (1988), which involved a direct action against the board of directors). We agree that the Court of Chancery appropriately analyzed the abdication claim as a direct — as distinct from a derivative—claim.

Courts have long recognized that the same set of facts can give rise both to a direct claim and a derivative claim. Bennett v. Breuil Petroleum Corp., Del.Ch., 99 A.2d *1213 236, 241 (1963); Borak v. J.I. Case Co., 7th Cir., 317 F.2d 838, 844-45 (1963), aff'd, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964). The due care, waste and excessive compensation claims asserted here are derivative and will be considered as such. Kramer v. Western Pacific Indus., Inc., Del.Supr., 546 A.2d 348, 353 (1988). The abdication claim, however, is a direct claim. In order to reach this conclusion, we believe a further exploration of the distinction between direct and derivative claims is appropriate.

A. Distinction Between Direct and Derivative Claims, Generally

As the Court of Chancery has noted: “Although the tests have been articulated many times, it is often difficult to distinguish between a derivative and an individual action.” In re Rexene Corp. Shareholders Litig., Del.Ch., 17 Del.J.Corp.L. 342, 348, 1991 WL 77529 (1991); see also Abelow v. Symonds, Del .Ch., 156 A.2d 416, 420 (1959) (“line of distinction ... is often a narrow one ...”). The distinction depends upon “‘the nature of the wrong alleged’ and the relief, if any, which could result if plaintiff were to prevail.” Kramer v. Western Pacific, 546 A.2d at 352 (quoting Elster v. American Airlines, Inc., Del.Ch., 100 A.2d 219, 221-223 (1953)). To pursue a direct action, the stockholder-plaintiff “must allege more than an injury resulting from a wrong to the corporation.” Id. at 351. The plaintiff must state a claim for “ ‘an injury which is separate and distinct from that suffered by other shareholders/ ... or a wrong involving a contractual right of a shareholder ... which exists independently of any right of the corporation.” Moran v. Household Int'l, Inc., Del. Ch., 490 A.2d 1059, 1070, aff'd, Del.Supr., 500 A.2d 1346 (1985) (quoting 12B Fletcher Cyclopedia Corps., § 5291 (Perm.Ed.1984)).

The American Law Institute (“ALI”) Principles of Corporate Governance: Analysis and Recommendations (1992) (“Principles ”) is helpful in this instance. Section 7.01 of the Principles undertakes to state the common law with respect to the distinction between direct and derivative actions. Id. § 7.01, cmt. a. The Comment also discusses a situation relevant to the case sub judice:

In some instances, actions that essentially involve the structural relationship of the shareholder to the corporation ... may also give rise to a derivative action when the corporation suffers or is threatened with a loss. One example would be a case in which a corporate official knowingly acts in a manner that the certificate of incorporation [or the Delaware General Corporation Law] denied the official authority to do, thereby violating both specific restraints imposed by the shareholders [or the GCL] and the official’s duty of care.

Id., cmt. c. The Comment further notes that, “courts have been more prepared to permit the plaintiff to characterize the action as direct when the plaintiff is seeking only injunctive or prospective relief.” Id., cmt. d.

With respect to the abdication claim, Grimes seeks only a declaration of the invalidity of the Agreements. Monetary recovery will not accrue to the corporation as a result. Chancellor Seitz illustrated this distinction in Bennett. The Court of Chancery there allowed the plaintiff-stockholder to proceed individually on his claim that stock was issued for an improper purpose and entrenchment; he proceeded derivatively on his claim that the stock was issued for an insufficient price. 99 A2d at 241.

B. Applicable Pleading Standards

Since the abdication claim is direct, not derivative, a motion to dismiss such a claim pursuant to Chancery Rule 12(b)(6) implicates the pleading standard of Chancery Rule 8(a). Solomon v. Pathe Communications Corp., Del.Supr., 672 A.2d 35, 39 (1996). Neither the pleading standard of Chancery Rule 9(b) (“circumstances constituting fraud or mistake shall be stated with particularity”) nor that of Chancery Rule 23.1 which requires, with respect to derivative claims, that a plaintiff plead “with particularity the efforts, if any ... to obtain the action the plaintiff desires ... and the reasons for the ... failure to obtain the action or for not making the effort,” is implicated. Chancery Rule 8(a), which is implicated here, requires only “a short and plain statement of the claim.” In considering a motion to dismiss for failure to state a direct claim, the Court of Chancery assumes the truth of well-plead *1214 ed allegations, giving to the plaintiff “the benefit of all reasonable inferences that can be drawn from ... [the] pleading.” In re USA Cafes, L.P. Litig., Del.Ch., 600 A.2d 43, 47 (1991); see also In re Santa Fe Pacific Corp. Shareholder Litig., Del.Supr., 669 A.2d 59, 65-66 (1995). Conclusory statements without supporting factual averments will not be accepted as true for purposes of a motion to dismiss. In re Tri-Star Pictures, Inc. Litig., Del.Supr., 634 A.2d 319, 326 (1995). We review de novo the decision by the Court of Chancery on a motion to dismiss a direct claim, applying the same legal standard. Solomon v. Pathe Communications Corp., 672 A.2d at 39.

C. Analysis of Grimes’ Abdication Claim

In the case before us, the abdication claim fails as a matter of law. Grimes claims that the potentially severe financial penalties which the Company would incur in the event that the Board attempts to interfere in Donald’s management of the Company will inhibit and deter the Board from exercising its duties under Section 141(a). 1 The Court of Chancery assumed that, if a contract could have the practical effect of preventing a board from exercising its duties, it would amount to a de facto abdication of directorial authority. 2 The Chancellor concluded, however, that Grimes has not set forth well-pleaded allegations which would establish such a situation. We agree.

Putting aside the payments which would result from a change of control, Grimes has pleaded, at most, that Donald would be entitled to $20 million in the event of a Constructive Termination. The Chancellor found, in light of the financial size of DSC reflected in the exhibits to the complaint, that this amount would not constitute a de facto abdication. Grimes contends, however, that the payments could amount to a de facto abdication in possible future circumstances. Such a set of facts has not been pleaded, is not before this Court, is based on speculation, and is not ripe for adjudication. 3

Directors may not delegate duties which lie “at the heart of the management of the corporation.” Chapin v. Benwood, Del.Ch., 402 A.2d 1205, 1210 (1979), aff'd sub nom. Harrison v. Chapin, Del.Supr., 415 A.2d 1068 (1980). A court “cannot give legal sanction to agreements which have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters.” Abercrombie v. Davies, Del.Ch., 123 A.2d 893, 899 (1956), rev’d on other grounds, Del.Supr., 130 A.2d 338 (1957). Distinguishing these cases, however, the Court of Chancery stated: “[U]nlike the agreements considered in Aber-crombie and Chapin, the Donald Agreements do not formally preclude the DSC board from exercising its statutory powers and fulfilling its fiduciary duty.” Grimes, 20 Del. J.Corp.L. at 774-775. Compare Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 943-44 (1985) (delegation to independent appraiser of responsibility to value oil and gas reserves as part of a merger agreement was proper exercise of business judgment).

With certain exceptions, “an informed decision to delegate a task is as much an exercise of business judgment as any other.” Rosenblatt, 493 A.2d at 943. Likewise, business decisions are not an abdication of directorial authority merely because they limit a board’s freedom of future action. A board which has decided to manufacture bricks has less freedom to decide to make bottles. In a world of scarcity, a decision to do one thing "will com *1215 mit a board to a certain course of action and make it costly and difficult (indeed, sometimes impossible) to change course and do another. This is an inevitable fact of life and is not an abdication of directorial duty.

If the market for senior management, in the business judgment of a board, demands significant severance packages, boards will inevitably limit their future range of action by entering into employment agreements. Large severance payments will deter boards, to some extent, from dismissing senior officers. If an independent and informed board, acting in good faith, determines that the services of a particular individual warrant large amounts of money, whether in the form of current salary or severance provisions, the board has made a business judgment. That judgment normally will receive the protection of the business judgment rule unless the facts show that such amounts, compared with the services to be received in exchange, constitute waste or could not otherwise be the product of a valid exercise of business judgment. See, e.g., Saxe v. Brady, Del.Ch., 184 A.2d 602, 610 (1962).

The Board of DSC retains the ultimate freedom to direct the strategy and affairs of the Company. If Donald disagrees with the Board, the Company may or may not (depending on the circumstances) be required to pay him a substantial sum of money in order to pursue its chosen course of action. So far, we have only a rather unusual contract, but not a case of abdication. 4 The Chancellor correctly dismissed the abdication claim.

III. Grimes’ Demand on The Board With Respect to The Derivative Claim Conceded That Demand Was Required.

The complaint alleges that Grimes made a pre-suit demand on the Board in the September 29, 1993, letter quoted above. In summary, the letter described the relevant provisions of the Donald Agreements and demanded that the Board “take immediate steps to abrogate” the cited sections of the Agreements. The Court of Chancery held that, by “making demand upon the board, plaintiff has in effect conceded that the board was in a position to consider and act upon his demand.” Grimes, 20 Del.J.Corp.L. at 772 (citing Spiegel v. Buntrock, Del.Supr., 571 A.2d 767, 775 (1990)). Contending that demand was excused, Grimes later filed suit alleging waste, excessive compensation and due care claims arising out of the Agreements. But the Chancellor held that Grimes waived his right to argue that demand was excused with respect to these claims because he had already made demand that the agreements be abrogated as unlawful. Id. We agree.

A. The Demand Requirement in Perspective

Because the prolix (43 page) complaint tends to confuse the issues in this case, it is appropriate to restate, as a matter of background, the Delaware jurisprudence relating to stockholder derivative litigation.

If a claim belongs to the corporation, it is the corporation, acting through its board of directors, which must make the decision whether or not to assert the claim. “[T]he derivative action impinges on the managerial freedom of directors.” Pogostin v. Rice, Del. Supr., 480 A.2d 619, 624 (1984). “[T]he demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of the corporation.” Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984).

*1216 A stockholder filing a derivative suit must allege either that the board rejected his pre-suit demand that the board assert the corporation’s claim or allege with particularity why the stockholder was justified in not having made the effort to obtain board action. This is a “basic principle of corporate governance” and is a matter of substantive law embodied in the procedural requirements of Chancery Rule 23.1. 5

One ground for alleging with particularity that demand would be futile is that a “reasonable doubt” exists that the board is capable of making an independent decision to assert the claim if demand were made. 6 The basis for claiming excusal would normally be that: (1) a majority of the board has a material financial or familial interest; 7 (2) a majority of the board is incapable of acting independently for some other reason such as domination or control; 8 or (3) the underlying transaction is not the product of a valid exercise of business judgment. 9 If the stockholder cannot plead such assertions consistent with Chancery Rule 11, 10 after using the “tools at hand” 11 to obtain the necessary information before filing a derivative action, then the stockholder must make a pre-suit demand on the board.

The demand requirement serves a salutary purpose. First, by requiring exhaustion of intracorporate remedies, the demand requirement invokes a species of alternative dispute resolution procedure which might avoid litigation altogether. 12 Second, if litigation is beneficial, the corporation can control the proceedings. Third, if demand is excused or wrongfully refused, the stockholder will normally control the proceedings. 13

*1217 The jurisprudence of Aronson and its progeny is designed to create a balanced environment which will: (1) on the one hand, deter costly, baseless suits by creating a screening mechanism to eliminate claims where there is only a suspicion expressed solely in conclusory terms; 14 and (2) on the other hand, permit suit by a stockholder who is able to articulate particularized facts showing that there is a reasonable doubt either that (a) a majority of the board is independent for purposes of responding to the demand, or (b) the underlying transaction is protected by the business judgment rule. 15

Aronson introduced the term “reasonable doubt” into corporate derivative jurisprudence. Some courts and commentators have questioned why a concept normally present in criminal prosecution would find its way into derivative litigation. 16 Yet the term is apt and achieves the proper balance. Reasonable doubt can be said to mean that there is a reason to doubt. 17 This concept is sufficiently flexible and workable to provide the stockholder with “the keys to the courthouse” 18 in an appropriate case where the claim is not based on mere suspicions or stated solely in conclusory terms.

B. Wrongful Refusal Distinguished from Excusal

Demand has been excused in many cases in Delaware under the Aronson test. 19 The law regarding wrongful refusal is *1218 not as well developed, however. 20 Although Délaware law does not require demand in every case 21 because Delaware does have the mechanism of demand excusal, it is important that the demand process be meaningful. Therefore, a stockholder who makes a demand is entitled to know promptly what action the board has taken in response to the demand. A stockholder who makes a serious demand and receives only a peremptory refusal has the right to use the “tools at hand” to obtain the relevant corporate records, such

as reports or minutes, reflecting the corporate action and related information in order to determine whether or not there is a basis to assert that demand was wrongfully refused. 22 In no event may a corporation assume a position of neutrality and take no position in response to the demand. Kaplan v. Peat, Marwick, Mitchell & Co., Del.Supr., 540 A.2d 726 (1988).

If a demand is made, the stockholder has spent one — but only one — “arrow” in the “quiver.” The spent “arrow” is the *1219 right to claim that demand is excused. 23 The stockholder does not, by making demand, waive the right to claim that demand has been wrongfully refused. 24

Simply because the composition of the board provides no basis ex ante for the stockholder to claim with particularity and consistently with Rule 11 that it is reasonable to doubt that a majority of the board is either interested or not independent, it does not necessarily follow ex post that the board in fact acted independently, disinterestedly or with due care in response to the demand. A board or a committee of the board may appear to be independent, but may not always act independently. 25 If a demand is made and rejected, the board rejecting the demand is entitled to the presumption of the business judgment rule unless the stockholder can allege facts with particularity creating a reasonable doubt that the board is entitled to the benefit of the presumption. 26 If there is reason to doubt 27 that the board acted independently or with due care in responding to the demand, the stockholder may have the basis ex post to claim wrongful refusal. The stockholder then has the right to bring the underlying action with the same standing which the stockholder would have had, ex ante, if demand had been excused as futile. See Stepak v. Addison, 11th Cir., 20 F.3d 398 (1994).

C. Application to This Case

In the case before the Court, plaintiff made a pre-suit demand. 28 Later, however, plaintiff contended that demand was excused. Under the doctrine articulated by this Court in Spiegel v. Buntrock, 29 plaintiff, by making a demand, waived his right to contest the independence of the board. As the Court of Chancery properly held, plaintiff may not bifurcate his theories relating to the same claim. Thus, demand having been made as to the propriety of the Agreements, it cannot be excused as to the claim that the Agreements constituted waste, excessive compensation or was the product of a lack of due care.

The Court of Chancery implicitly applied a test analogous to res judicata to determine whether Grimes’ demand letter conceded that demand was required for all legal theories arising out of the set of facts described in the demand letter. We believe this to be a correct approach. The alternative claims raised in the complaint fit squarely within the same transactional rubric as the demand since all of the claims, however denominated, arise out of the Agreements. As the Court of Chancery stated: “There is little to recommend a process in which a shareholder seeks board consideration of only some aspects of a transaction or puts forward only selected theories for board consideration, while reserving other theories for judicial consideration. Such a process would be neither efficient nor fair.” Grimes, 20 Del.J.Corp.L. at 772.

The same concerns are expressed in the Restatement (Second) of Judgments, which asserts that “fairness to the defendant, and sound judicial administration, require that at some point litigation over the particular controversy come to an end.” Restatement (Second) of Judgments § 19, cmt. a. (1980). Since the making of a pre-suit demand con *1220 cedes that demand is required, the concession should apply “to all or any part of the transaction, or series of connected transactions, out of which the action [demand] arose.” Id. § 24; see Foltz v. Pullman, Inc., Del.Super., 319 A.2d 38, 40 (1974).

In Spiegel, this Court held that “[a] shareholder who makes a demand can no longer argue that demand is excused.” 571 A.2d at 775. Permitting a stockholder to demand action involving only one theory or remedy and to argue later that demand is excused as to other legal theories or remedies arising out of the same set of circumstances as set forth in the demand letter would create an undue risk of harassment.

In this case, the Board of DSC considered and rejected the demand. After investing the time and resources to consider and decide whether or not to take action in response to the demand, the Board is entitled to have its decision analyzed under the business judgment rule unless the presumption of that rule can be rebutted. Spiegel, 571 A.2d at 776. Grimes cannot avoid this result by holding back or bifurcating legal theories based on precisely the same set of facts alleged in the demand.

Since Grimes made a pre-suit demand with respect to all claims arising out of the Agreements, he was required by Chancery Rule 23.1 to plead with particularity why the Board’s refusal to act on the derivative claims was wrongful. Levine v. Smith, 591 A.2d at 211. The complaint recites the Board’s rejection of Grimes’ demand and proceeds to assert why Grimes disagrees with the Board’s conclusion. The complaint generally asserts that the refusal could not have been the result of an adequate, good faith investigation since the Board decided not to act on the demand. Such eonelusory, ipse dixit, assertions are inconsistent with the requirements of Chancery Rule 23.1. See Levine, 591 A.2d at 214. The complaint fails to include particularized allegations which would raise a reasonable doubt that the Board’s decision to reject the demand was the product of a valid business judgment. 30

IV. Conclusion

Accordingly, the judgment of the Court of Chancery is AFFIRMED.