Alfred Blasband v. Steven M. Rales Mitchell P. Rales John Doe 1-10 Danaher Corporation, Alfred Blasband, Derivatively on Behalf of Danaher Corporation

I.

FACTUAL AND PROCEDURAL HISTORY

Alfred Blasband appeals from a district court order of August 15, 1991, dismissing his complaint pursuant to Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 23.1 in this shareholder derivative suit. This appeal raises difficult issues regarding shareholder standing and demand futility in derivative actions brought under Delaware law. In view of the procedural posture of the case, we will accept Blasband’s allegations in our disposition of the appeal.

Blasband is a former shareholder of Eas-co Hand Tools, Inc. On September 1,1988, while Blasband was an Easco shareholder, Easco initiated a public offering of $100 million of 12.875% Senior Subordinated Notes (the “Note Offering”). In the prospectus for the Note Offering, Easco disclosed that the proceeds would be used for repayment of outstanding indebtedness, general corporate purposes, and expansion of Easco’s business through internal growth and acquisitions. The prospectus further stated that “[pjending such uses, the Company will invest the balance of the net proceeds from this offering in government and other marketable securities which are expected to yield a lower rate of return than the rate of interest borne by the Notes.”

After the Note Offering was completed, Easco invested at least $61.9 million of the proceeds in high-yield, highly speculative debt securities, commonly known as junk bonds. In its Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1988, Easco disclosed these investments as “tempo-rar[y] invest[ments] in marketable securities and cash equivalents.” One year later, in its 1989 Annual Report and 10-K, Easco disclosed that it still held these investments *1038 but that “[d]uring 1989, the market for these securities became volatile and some market values declined significantly.” Explaining that “[gjreater risk is generally associated with these high-yield securities, for which a thinly traded market exists and for which market quotations are not always available[,]” Easco stated that it had reduced the carrying value of its portfolio by $14 million and that it would probably suffer further losses if the remaining issues' were sold. Easco disclosed an additional $1 million loss in its March 81, 1990 Form 10-Q filed with the SEC.

In February 1990, Easco entered into a merger agreement with the nominal defendant Danaher Corporation and Combo Acquisition Corporation, a wholly owned subsidiary of Danaher, providing for Easco shareholders to receive .4175 shares of Danaher common stock for each of their shares of Easco common stock. The merger was consummated in June 1990 with Easco surviving as a wholly owned subsidiary of Danaher. Consequently, Blasband’s 1,100 shares of Easco were converted into 458 shares of Danaher. 1

Prior to the merger, Mitchell P. Rales was Chairman of Easco’s board of directors and owned approximately 25% of Easco’s common stock. His brother, Steven M. Ra-les, was a director of Easco and owned 27% of its stock. Mitchell Rales is also President and a director of Danaher, and Steven Rales is Chairman of the board of directors of Danaher. Together the brothers own 44% of Danaher’s common stock. Beginning sometime in the mid-1980’s, the Rales brothers retained Drexel Burnham Lambert Incorporated to assist in the Rales’ corporate acquisition strategy. Through junk bond financing arranged by Drexel, the Rales brothers expanded Danaher by acquiring Western Pacific Corporation and Chicago Pneumatic Corporation. In 1988 the Rales brothers hired Drexel in connection with an ultimately unsuccessful $2.5 billion bid to acquire another company. In addition, Drexel assisted the Rales brothers in acquiring an interest in Easco in 1986 by partially providing the financing. 2 Furthermore, Drexel was selected as the sole underwriter for the Note Offering.

The junk bond investment of the proceeds of the Note Offering did not go unnoticed for, on October 25, 1990, Blasband’s counsel sent a letter to the boards of directors of Easco and Danaher setting forth the discrepancy between the proposed use of the proceeds in the prospectus for the Note Offering and Easco’s financial statements disclosing the actual investments in junk bonds. The letter requested additional information to explain, inter alia: (1) why the junk bond portfolio had lost $14 million in one year; (2) what securities Eas-co . had purchased and sold between September 1, 1988, and December 31, 1989, and at what prices and through which brokerage house; (3) which Easco officers and directors approved or selected the purchases and sales; and (4) why Easco used the proceeds of the Note Offering in a manner contrary to that described in the prospectus. Counsel for Blasband stated that, although much of this information “could be obtained through a formal demand for inspection of the Company's books and records, we believe that it is in our mutual interest to proceed on a less formal basis.”

Counsel for Danaher and Easco responded in a letter dated December 17,1990, that “it would be inappropriate at this time to provide” the requested information. Further, counsel stated that “Easco fully and fairly complied with the requirements of the federal securities laws and regulations in disclosing all material information concerning the Note Offering and the subsequent use of the proceeds of that offering to its shareholders in its public financing.” Additionally, counsel stated that compliance with the request “would impose a substantial burden on our clients ... [and] would be time-consuming and highly dis *1039 ruptive of the day-to-day management of the business.... ”

Unsatisfied with this response, Blasband filed this derivative action in the United States District Court for the District of Delaware on behalf of Danaher on March 25, 1991. The essence of Blasband’s claim is that the Rales brothers violated their fiduciary duties owed to Easco by investing proceeds of the Note Offering in highly speculative junk bonds as consideration for their business dealings with Drexel and not for a legitimate corporate purpose. Bias-band named the Rales brothers and ten “John Does” who were officers and directors of Easco at the time of the Note Offering as defendants. Danaher was joined as a nominal defendant. Blasband has not specifically identified the John Doe defendants and thus the Rales brothers remain the only actual defendants and we therefore refer to them as the appellees.

Prior to discovery, the appellees moved to dismiss the complaint pursuant to Rules 12(b)(6) and 23.1 on the grounds that Bias-band had not made an appropriate demand on the directors of Danaher to take action and did not establish demand excusal. 3 Furthermore, the appellees contended that Blasband lacked standing to bring this action.

The district court granted the appellees’ motion. Applying Delaware law, the district court held that demand excusal should be measured with regard to the Danaher board, and that Blasband did not adequately plead that demand would have been futile. Additionally, the court agreed with the appellees that Blasband lacked standing as a result of the merger. Accordingly, on August 15, 1991, the court dismissed the complaint with prejudice. Blasband on behalf of Danaher Corp. v. Rales, 772 F.Supp. 850 (D.Del.1991). Blasband filed a timely notice of appeal on September 12, 1991.

We agree with the district court that Blasband has not adequately established that he is excused from making a proper demand. However we also believe, contrary to the district court, that Blasband does have standing to maintain this derivative action, and we therefore hold that Blasband should be given the opportunity to move to amend the complaint to allege additional facts establishing that a proper demand would have been futile. Accordingly, we will vacate the order of August 15, 1991, and will remand the case for further proceedings. 4

II.

STANDARD OF REVIEW

Blasband argues that our review is plenary to the extent that the district court granted the motion to dismiss pursuant to Rule 12(b)(6). See Scattergood v. Perelman, 945 F.2d 618, 621 (3d Cir.1991). The appellees, on the other hand, assert that the district court exercised its discretion in dismissing this action pursuant to Rule 23.1, and accordingly we may reverse only if we find an abuse of discretion. In fact, the district court’s order recited that it granted the motion to dismiss under both Rules 12(b)(6) and 23.1. However, the district court’s label is not binding on us. Rather, we must look to the course of the proceedings in the district court and the basis for its decision to determine the standard of review. Melo v. Hafer, 912 F.2d 628, 633 (3d Cir.1990), aff'd, — U.S.-, 112 S.Ct. 358, 116 L.Ed.2d 301 (1991); Rose v. Bartle, 871 F.2d 331, 340 (3d Cir.1989).

Rule 23.1 requires the plaintiff in a derivative action to allege that he or she was a shareholder at the time of the challenged transaction, and to set forth “with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors ..., and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” As we later discuss, the rule does not require a plaintiff to make a demand upon the directors to take action where to do so would be futile. *1040 Generally, the district court’s determination of demand futility depends upon the facts of each case and is reviewed for abuse of discretion. Peller v. Southern Co., 911 F.2d 1532, 1536 (11th Cir.1990); Starrels v. First Nat’l Bank, 870 F.2d 1168, 1170 (7th Cir.1989); Gaubert v. Fed. Home Loan Bank Bd., 863 F.2d 59, 68 n. 10 (D.C.Cir.1988); Lewis v. Graves, 701 F.2d 245, 248 (2d Cir.1983). See also Lewis v. Curtis, 671 F.2d 779, 783 (3d Cir.), cert. denied, 459 U.S. 880, 103 S.Ct. 176, 74 L.Ed.2d 144 (1982).

However, on this appeal Blasband challenges the legal precepts employed by the district court in making its determination that he did not adequately plead demand futility. We exercise plenary review over a district court’s choice and interpretation of legal precepts. Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 642 (3d Cir.1991) (citing Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981), cert. denied, — U.S. -, 112 S.Ct. 1476, 117 L.Ed.2d 620 (1992)). We apply this standard regardless of whether the district court is applying federal law or state law. See Salve Regina College v. Russell, — U.S.-, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991). 5 Accordingly, while we review both the district court’s determination of demand futility and its decision to dismiss the complaint with prejudice under an abuse of discretion standard, see Lewis v. Curtis, 671 F.2d at 783, we exercise plenary review over its choice of legal precepts upon which those determinations were based. Furthermore, as we are deciding the standing issue by the application of legal precepts our review on this point is plenary.

III.

STANDING

Although the district court primarily dismissed Blasband’s complaint because of his failure to satisfy the demand requirement, we will first address the issue of standing. The appellees argue that as a result of the merger Blasband lacks standing to bring this derivative action. Bias-band counters that he meets the statutory standing requirements and further that he has “successor derivative standing” by virtue of his status as a former Easco shareholder and his current status as a Danaher shareholder.

In general under Delaware law which the parties agree is applicable a plaintiff must have been a shareholder at the time of the challenged transaction to have standing to maintain a shareholder derivative suit. Delaware General Corporation Law § 327, Del.Code Ann. tit. 8, § 327 (1983). 6 The sole purpose of section 327, as stated by Chancellor Seitz, is “to prevent what has been considered an evil, namely, the purchasing of shares in order to maintain a derivative action designed to attack a transaction which occurred prior to the purchase of the stock.” Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 111 (Del.Ch. 1948). In addition to section 327’s requirement, the Delaware courts require that the plaintiff remain a shareholder at the time of the filing of the suit and throughout the litigation. Kramer v. Western Pacific Indus., Inc., 546 A.2d 348, 354 (Del.1988); *1041 Lewis v. Anderson, 477 A.2d 1040, 1046 (Del.1984). This requirement ensures that the plaintiff has sufficient incentive to represent adequately the corporation’s interests during litigation. See Portnoy v. Kawecki Berylco Indus., Inc., 607 F.2d 765, 767 (7th Cir.1979). Additionally, as with section 327, the continuing ownership requirement is intended to prevent abuses associated with derivative actions. Lewis v. Anderson, 477 A.2d at 1046.

Where there has been a cash-out merger, it is clear that a former shareholder may not maintain a derivative action, for he or she would no longer have an interest in a subsequent corporate recovery. See, e.g., Kramer, 546 A.2d 348. However, where, as here, the plaintiff receives shares of a new corporate entity, the standing issue is less clear, as the plaintiff will have a financial interest in the derivative action. For example, in Helfand v. Gambee, 37 Del.Ch. 51, 136 A.2d 558 (Del.Ch.1957), the plaintiff was a shareholder in a corporation required to reorganize and separate certain aspects of its business pursuant to a consent decree resulting from an antitrust action brought by the United States. As a result of the breakup, the plaintiffs shares were exchanged for shares of two new corporations. In denying the defendants’ motion to dismiss the complaint on the ground that the plaintiff lacked standing to challenge activities that took place prior to the share exchange, the court observed:

In Rosenthal v. Burry Biscuit Corp., supra, this Court stated that the sole purpose of § 327, Title 8 Del.C. was to prevent an evil, namely the purchase of shares for the purpose of bringing a derivative action based on transactions antedating such purchase. Plaintiff is not such a purchaser and the fact that she holds two pieces of paper rather than one as evidence of her ... investment ... should not, in my opinion, foreclose her from complaining of acts antedating the incorporation of [the post-merger corporation] when such corporation is in effect a successor to [the pre-merger corporation],

136 A.2d at 562.

Similarly, in Schreiber v. Carney, 447 A.2d 17 (Del.Ch.1982), a merger resulted in the shareholders receiving a share-for-share exchange of stock with a newly formed holding company. The court held that the plaintiff maintained “equitable derivative standing” to bring a derivative action to challenge acts that occurred prior to the reorganization since the “merger had no meaningful effect on the plaintiff’s ownership of the business enterprise.... ” Id. at 22. However, the court carefully distinguished cases involving “either cash-out mergers or mergers with outside or preexisting corporations with substantial assets.” Id. See, e.g., Bonime v. Biaggini, No. 6925, slip op. at 7, 1984 WL 19830 (Del.Ch. Dec. 7, 1984) (refusing to extend Schreiber where the new entity had a “corporate mix [that was] distinctly different from that of” the prior corporation).

In view of the principles reflected in cases such as Schreiber and in the recognition of the need to avoid the shielding of fraudulent transactions, the Delaware courts regularly indicate that there are two exceptions to the general rule that a plaintiff loses standing where he or she loses stock as a result of a merger. These exceptions apply (1) where the merger itself is the subject of a claim of fraud; see, e.g., Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1188-89 (Del.1988); or (2) where the merger is in reality a reorganization not affecting the plaintiff’s ownership in the business enterprise, see, e.g., Schreiber, AA1 A.2d at 22. See generally Kramer, 546 A.2d at 354; Lewis v. Anderson, 477 A.2d at 1046 n. 10. 7 In this case, however, *1042 Blasband does not contend that either of these exceptions applies to him.

Rather, the focus in this appeal is on Lewis v. Anderson, the seminal Delaware Supreme Court case concerning the contemporaneous ownership requirement in the merger context. The plaintiff in Lewis v. Anderson, a shareholder of Conoco, Inc. (“Old Conoco”), filed a derivative suit on its behalf against various Old Conoco officers and directors, asserting that “golden parachutes” granted by Old Conoco to these individuals constituted a waste of corporate assets. Shortly after the plaintiff filed his complaint, Old Conoco merged with Du Pont Holdings, Inc., a wholly owned subsidiary of E.I. Du Pont de Nemours and Company (“Du Pont”) and the surviving corporation was renamed Conoco, Inc. (“New Conoco”). The merger provided for Old Conoco shareholders to receive common stock of Du Pont in exchange for their shares of Old Conoco. Du Pont became the sole shareholder of New Conoco. 477 A.2d at 1042.

The court rejected the plaintiffs contention that the derivative cause of action passed not to New Conoco or Du Pont, but rather to the former shareholders of Old Conoco. The court stated that under 8 Del.C. § 259(a), any derivative claim against the individual directors of Old Co-noco was a property right of Old Conoco which passed to New Conoco following the merger. 8 477 A.2d at 1044-47. Additionally, the court noted that neither of the two exceptions to a shareholder’s loss of standing upon merger which we have already described was applicable. Id. at 1046 n. 10. Finally, the court rejected the plaintiff's policy argument that permitting dismissal would leave a wrong unremedied, reasoning that the disposition of the plaintiffs suit was a matter for New Conoco’s board of directors. Id. at 1050-51. Accordingly, the court concluded that “[a] plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing to continue a derivative suit.” Id. at 1049. Because the plaintiff in Lewis v. Anderson asserted that he had standing only by virtue of his ownership of Old Conoco stock, the Supreme Court of Delaware did not have occasion to consider whether his indirect financial interest in the outcome of the litigation attributable to his ownership of shares in Du Pont gave him standing to bring the action after the merger.

However, we believe that the Delaware Supreme Court sub silentio recognized an indirect financial interest as a basis for standing in 1988 when in Stern-berg v. O’Neil, 550 A.2d 1105 (Del.1988), apparently for the first time, it permitted a plaintiff to pursue a double derivative suit. 9 A double derivative action is identical in form to a traditional derivative action, except that in a double derivative the suit is brought on behalf of one corporation (e.g. a parent) to enforce a cause of action in *1043 favor of a related corporation (e.g. its subsidiary). As explained by one leading authority:

The holding company owes a duty to use its control of the subsidiary to sue to right wrongs to it, and the shareholder may in effect compel specific performance of these connected duties in a double representative action....

In a ‘double derivative’ action, the shareholder is effectively maintaining the derivative action on behalf of the subsidiary, based upon the fact that the parent or holding company has derivative rights to the cause of action possessed by the subsidiary. The wrong sought to be remedied by the complaining shareholder is not only that done directly to the parent corporation in which he or she owns stock, but also the wrong done to the corporation’s subsidiaries which indirectly, but actually, affects the parent corporation and its shareholders. Notwithstanding that the recognition of double derivative suits relaxes the plaintiff’s contemporaneous ownership requirement, the acceptance of the action acknowledges the realities of the changing techniques and structures of the modem corporation. The ultimate beneficiary of a double derivative action is the corporation. that possesses the primary right to sue.

13 Charles R.P. Keating, Gail A. O’Grad-ney, Fletcher Cyclopedia of Corporations § 5977, at 240 (rev. ed. 1991) (footnotes omitted) (emphasis added). See also Stern-berg, 550 A.2d at 1107 n. .1 (citing Fletcher); Brown v. Tenney, 125 I11.2d 348, 355-57, 126 IlLDec. 545, 548-49, 532 N.E.2d 230, 233-34 (Ill.1988).

We believe that this logic applies equally in the context at hand. The plaintiff’s personal stake in the litigation in Sternberg— which was sufficient to confer standing— was no greater than Blasband’s stake in this action. Blasband continues to own shares in Danaher, the parent of the corporation, Easco, that has the primary right to sue to redress the wrongs asserted in his complaint and thus he has an indirect financial interest in the litigation. Therefore, Blasband meets the continuing ownership requirement to the same extent that a plaintiff in a double derivative action satisfies this requirement. Additionally, it is undisputed that Blasband was a shareholder at the time of the challenged transaction as required by 8 Del.C. § 327 and thus could not have purchased his shares to institute a strike suit challenging the investment of the proceeds of the Note Offering.

Overall, we are faced with a case where the literal requirements as well as the purposes underlying both components of shareholder derivative standing — ownership at the time of the challenged transaction and continuing ownership during the litigation — have been satisfied in accordance with Delaware law. Yet the appellees urge that the complaint was properly dismissed on the ground that Blasband lacks standing. We acknowledge that their position is understandable, as there is language in Lems that could be read as foreclosing any possibility of maintaining a derivative action in the merger context we face. Furthermore, the facts of Lewis closely paral: lei this case. But this case differs critically from Lewis in a legal sense in that the plaintiff in that case seems not to have claimed to have standing as a shareholder of Du Pont, the parent corporation. Therefore, there is no indication in Lewis that the Supreme Court of Delaware considered an argument comparable to that now raised by Blasband, i.e., that he has standing as a shareholder of Danaher.

To be sure, one could argue that, if the plaintiff could have merely amended his complaint to allege a cause of action on behalf of Du Pont, the court had no need to make an analysis of his possible standing as an Old Conoco shareholder. Yet, as the plaintiff in Lewis apparently did not attempt to amend his complaint to bring a derivative action on behalf of New Conoco by virtue of his status as a Du Pont shareholder, it was not necessary for the court to address the issue. Additionally, as will be apparent from our discussion below, even if the plaintiff had pursued such an argument, the merger would have implicated the adequacy of the plaintiff’s demand *1044 efforts which is a further reason why it may have been premature for the court to address this potential standing argument. Importantly, moreover, the court could not have implicitly rejected the plaintiff’s standing to bring an action on behalf of the parent without thereby calling into question the standing of anyone in Delaware to bring a double derivative suit. For purposes of standing, there is simply no principled distinction between a derivative action brought by a shareholder of a parent corporation on behalf of its subsidiary following a merger to redress wrongs done to the subsidiary prior to the merger where the plaintiff continuously has held a financial interest in the subsidiary directly, and then after the merger indirectly, and a conventional double derivative action outside the merger context. Therefore we will not assume that the court in Lems intended to reject the plaintiffs standing as a shareholder in Du Pont.

Lewis v. Anderson recognizes the well-established principle that the board of directors has exclusive control over the affairs of the corporation, “including the disposition'of all choses in action[,]” and recognizes as well that where there has been a merger, this responsibility passes not to the shareholders of the pre-merger company but to the board of the surviving company. 477 A.2d at 1050 n. 19. However, the Supreme Court of Delaware also has repeatedly recognized the right of shareholders to sue on behalf of the corporation when the board refuses to assert a claim rightly belonging to it. See Pogostin v. Rice, 480 A.2d 619, 624 (Del.1984); Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984). Here, Blasband alleges that the persons in control of both Danaher and post-merger Easco have refused to assert such claims. Accordingly, our result is entirely consistent with Lewis v. Anderson’s recognition that choses in action pass to the surviving corporation upon a merger. While there will always be a tension between the managers’ and directors’ right to manage the corporation and the shareholders’ right to impinge on this managerial freedom through derivative actions, this tension traditionally has been dealt with by the requirement of demand, an issue we discuss below. See generally Aronson v. Lewis, 473 A.2d 805, 811-12 (Del.1984). But a standing determination raises issues discrete from impingement of managerial freedom and, under the facts of this case, we cannot say that Blasband lacks standing to maintain this action.

We acknowledge that this case may not fit neatly into existing Delaware corporation law. However, we are guided by the recognition of the Delaware courts that “[a] shareholder derivative suit is a uniquely equitable remedy....” Levine v. Smith, 591 A.2d 194, 200 (Del.1991). Thus, the Delaware courts have consistently refused to apply its corporate law rigidly where to do so would be inequitable. See, e.g., Schreiber, 447 A.2d at 22 (“it is clear that the provisions of 8 Del.C. § 327 are not inflexible standards and this Court, as a Court of Equity, must examine carefully the particular circumstances of each case”); see also Cede & Co., 542 A.2d at 1189 (court's decision “[bjased on ... policy concerns, and considerations of equity”). Further, the Delaware courts have observed in shareholder actions that “equity will not suffer a wrong without a remedy....” In re: Tri-Star Pictures, Inc. Litigation, No. 9477, 1992 WL 37304, at * 9 (Del.Ch. Feb. 21, 1992) (quoting Weinberger v. UOP, Inc., No. 5642, slip op. at 20-21, 1985 WL 11546 (Del.Ch. Jan. 30, 1985) aff'd, 497 A.2d 792 (Del.1985) (table)).

Hence, our conclusion that Blasband has standing is bolstered by the fact that a dismissal of Blasband’s complaint may well leave a wrong unremedied. In contrast to Lewis v. Anderson, where the court observed that New Conoco, the successor company, had an opportunity to seek relief for the wrongs alleged in that case, 477 A.2d at 1050-51, here Blasband alleges that the successor company has a cause of action that it refuses to pursue. This is precisely where Delaware courts permit shareholders to step in and sue derivatively-

We also point out that we doubt that Blasband would be entitled to bring a direct action to recover for his alleged inju *1045 ries as it is clear that Delaware courts would treat any claim asserted by him individually as derivative in nature: “[T]o have standing to sue individually, rather than derivatively on behalf of the corporation, the plaintiff must allege more than an injury resulting from a wrong to the corporation. ... For a plaintiff to have standing to bring an individual action, he must be injured directly or independently of the corporation.” Kramer v. Western Pacific Indus., 546 A.2d at 351 (emphasis in original). In Kramer, the court held that actions charging waste or mismanagement which depress the value of stock may not be maintained directly, but must be brought derivatively on behalf of the corporation. 10 Furthermore, Blasband does not challenge the propriety of the merger terms themselves. See id. at 353-54. 11

We also believe that our result may not be avoided by an argument that Blasband may assert a claim derivative solely to Dan-aher on a theory that the Danaher board’s failure to pursue redress on behalf of Eas-co rose to the level of a breach of fiduciary duty. Under this theory, there would be two alleged wrongs: the alleged wrongs committed by the Rales brothers upon Eas-co by the investment of the proceeds of the Note Offering and Danaher’s failure to seek redress for those acts. A derivative suit to recover for the latter elusive, continuing breach would be highly problematic. For example, a court would have to determine with precision the point in time when Danaher’s failure to act became a breach of fiduciary duty, giving all Danaher shareholders at that time the right, upon satisfying the demand requirement, to maintain a derivative action. It does not matter that Blasband necessarily would be a shareholder at this point in time because if he properly may maintain such an action then anyone could buy into the suit by purchasing shares of Danaher so long as it is determined that that shareholder owned stock at the time the omission rose to the level of a breach of fiduciary duty. 12

We realize that in limited circumstances, Delaware courts have recognized an exception to the contemporaneous ownership requirement where there has been a “continuing wrong.” Schreiber v. R.G. Bryan, 396 A.2d 512 (Del.Ch.1978); New-kirk v. W.J. Rainey, Inc., 76 A.2d 121 (Del.Ch.1950). See also Brambles USA, Inc. v. Blocker, 731 F.Supp. 643 (D.Del. 1990); Chirlin v. Crosby, No. 6632, slip op., 1982 WL 17872 (Del.Ch. Dec. 7, 1982); *1046 cf. 7C Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure, § 1828, at 65 (2d ed. 1986) (“federal courts generally have rejected the contention that the entire series of events constitutes a single transaction—the so-called ‘continuing wrong’ notion-entitling plaintiff to bring suit for injuries suffered by the corporation subsequent to plaintiffs acquisition of stock”). However, because every wrongful transaction may be viewed as a continuing wrong to the corporation until remedied, Newkirk, 76 A.2d at 123, the “test to be applied in such situations concerns whether the wrong complained of is in actuality a continuing one or is one which has been consummated_ [Wjhat must be decided is when the specific acts of alleged wrongdoing occur, and not when their effect is felt.” Schreiber, 396 A.2d at 516. Accordingly, a derivative action on behalf of Danaher would not be cognizable under the continuing wrong theory, for it is etear that such an action would be predicated upon the investment in junk bonds rather than the mere failure to file a lawsuit or otherwise seek redress for that transaction, See Newkirk, 76 A.2d at 124 (“[T]he allegations concerning the conspiracy refer back to the alleged original wrongs, all of which occurred before these plaintiffs acquired their stock. These wrongful acts cannot by the specious device of employing appropriate language be transferred into continuing wrongs for the purpose of overriding” section 327.); see also Brambles USA, Inc., 731 F.Supp. at 652 (court declined to apply continuing wrong exception in part because, “[a]s a matter of policy, one who buys shares with knowledge of a purported wrongdoing should not be per-mitted to bring suit to challenge that wrongdoing”).

In the final analysis, . , ,, actl°n 18 abm to a double derivative suit, H®has flled an actl0n as a Eanaher share- hol^erJ° Pu,rsuf acaase of act,(m be‘ ba ^ Banaher s wboby owned subsidiary, Easco- Blasband was a shareholder of the company allegedly wronged at the time of the challenged transactions. Following tbese transactions, Easco merged into a new company, and survived as a wholly owned subsidiary of Danaher. As Lewis v. Anderson makes clear, all of “Old Eas-co’s” causes of action survived as well, passing to “New Easco,” but here “New Easco” has not pursued its cause of action, Throughout this time, Blasband has main-tained a financial interest in Easco, al-though after the merger his interest be-came indirect. Had Blasband been given shares of the post-merger Easco, there would be no doubt that he could now main-tain a derivative action on its behalf. Inas-much as Delaware recognizes double deriv-ative actions, the fact that Blasband has been given shares of Easco’s parent rather than the new subsidiary should be of little consequence. 13 Accordingly, we hold that, despite the rather broad language in Lewis v. Anderson, Blasband has satisfied Dela-ware’s statutory and common law standing requirements to maintain this derivative ac-tion. 14

*1047 IV.

DEMAND

A.

General Principles

As the United States Supreme Court recently recognized, Rule 23.1 “does not create a demand requirement of any particular dimension. On its face, Rule 23.1 speaks only to the adequacy of the shareholder representative’s pleadings.” Kamen v. Kemper Financial Services, Inc., — U.S. -, -, 111 S.Ct. 1711, 1716, 114 L.Ed.2d 152 (1991) (emphasis in original). The substantive requirements of demand are a matter of state law. See id. — U.S. at -, 111 S.Ct. at 1716-17; Gonzalez Turul v. Rogatol Distributors, Inc., 951 F.2d 1, 2 & n. 3 (1st Cir.1991); RCM Securities Fund, Inc. v. Stanton, 928 F.2d 1318, 1330 (2d Cir.1991); Starrels, 870 F.2d at 1170; Lewis v. Curtis, 671 F.2d at 785. Thus, Delaware law governs the substantive requirements of Blasband’s claims, including the demand component. See 772 F.Supp. at 854.

While Delaware courts routine