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An Introduction to the Law of Corporations: Cases and Materials

Beam v. Stewart

Beam is a ruling on a defendant's 23.1 motion to dismiss. In the 23.1 motion, the defendants are arguing that demand was not futile under the relevant test (Rales in this case), and plaintiffs should have properly made demand. Plaintiffs argue that they didn't make demand because doing so would have been futile because of the board's lack of independence from Martha Stewart and the fact that Stewart was interested in the transaction.

The Chancery Court articulated the standard at issue here in the following way:

“Because this claim does not challenge an action of the board of directors of MSO, the appropriate test for demand futility is that articulated in Rales v. Blasband. Particularly, the Court's task is to evaluate whether the particularized allegations “create a reasonable doubt that, as of the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.” Rales requires that a majority of the board be able to consider and appropriately to respond to a demand “free of personal financial interest and improper extraneous influences.” Demand is excused as futile if the Court finds there is “a reasonable doubt that a majority of the Board would be disinterested or independent in making a decision on demand.”"

It is important to your understanding of Beam to remember that when the court approaches the question of interestedness and independence of the board in a 23.1 motion to dismiss, the board enjoys the benefit of the business judgment presumption. That means the plaintiff in its pleadings must allege facts to overcome that presumption. Mere statements that board members are either interested or not independent will not be sufficient to establish demand futility.