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An Introduction to the Law of Corporations: Cases and Materials

Gentile v. Rossette

Because there are important procedural hurdles to bringing a derivative suit, it oftentimes becomes an important point of contention between the parties whether the particular litigation is direct or derivative. This case is an example of that problem in action. Note how the court applies the Tooley test to assist it in answering the question whether the claims are direct (and thus properly brought by the stockholder) or are derivative in nature (requiring the stockholder to make a demand on the board and thus lose control over the litigation).

This opinion is a decision on a Rule 23.1 Motion to Dismiss (“MTD”). Much shareholder litigation lives or dies at this stage. The 23.1 MTD battle is typically fought on two grounds: 1) character of the litigation; and 2) demand futility.

With respect to the character of the litigation, the defendant board will typically attempt characterize the litigation as derivative and then will argue since the plaintiff failed to make a demand on the board as required under Rule 23.1 for derivative litigation, and for that reason the court should dismiss the litigation in favor of the defendant board.  For its part, plaintiff will attempt to characterize the litigation as direct, thus ensuring that the case cannot be dismissed on procedural grounds. 

We will take up demand futility later in this chapter.