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Introduction to the Law of Corporations: Cases and Materials

Effect of Refusal of Demand

If a board receives and then refuses demand, the stockholder may not bring a derivative claim on behalf of the corporation. Of course, if a board could just refuse demand without regard to the merits of the demand, the demand requirement would devolve into a toothless exercise. Consequently, when a board refuses demand, the good faith and reasonableness of the board's refusal may still be examined by the courts. 

However, a board's decision to refuse demand is a business decision, like any other. As a result, such decisions receive the protection of the business judgment presumption.  In challenging a demand refusal, a stockholder will have to plead particularized facts with respect to the board's decision to refuse demand as to overcome the business judgment presumption. 

In the case that follows, Solak v. Welch, plaintiffs are obviously aware of the demand requirement. Plaintiffs get cute and send pre-litigation communications to the board with a footnote attempting to disclaim that the prelitigation communication constituted demand for purposes of derivative litigation, thus keeping their options open. The court has views about plaintiffs being a little too cute like this.