The Court then addressed whether Plaintiff adequately pleaded demand futility under the standard established in Aronson, applied by Delaware courts when an affirmative board decision is challenged.¹⁵ The Court explained Plaintiff must “plead with particularity” that the Board breached its fiduciary duty of loyalty by (i) executing the separation agreement to advance its own interests at the expense of lululemon, or (ii) acting in bad faith.¹⁶ Although the second prong typically analyzes both care and loyalty issues, lululemon adopted an exculpatory clause in its corporate charter, which acts as a liability shield for directors accused of duty-of-care violations.¹⁷ As such, Plaintiff was required to plead that a majority of the Board acted in breach of the duty of loyalty or acted in bad faith (that is, the challenged decision was “so egregious on its face that board approval cannot meet the test of business judgment”).¹⁸ The Court found Plaintiff failed to satisfy either prong.¹⁹

To plead demand futility under the first Aronson prong, the Court explained Plaintiff must plead particularized facts supporting a reasonable inference that a majority of directors were “interested” because they (i) appeared on both sides of the separation agreement, (ii) derived a personal financial benefit from it (self-dealing), or (iii) were beholden to an interested person.²⁰

The Court rejected Plaintiff’s argument that the Board was interested in the separation agreement as a means to hide board-level oversight failures and avoid liability for those failures.²¹ The Court noted “the Complaint acknowledges [lululemon] established an ethics code and made the whistleblower hotline available to employees, and then used those systems to detect [the CEO’s] misbehavior,” making it inconceivable “that the Board ‘utterly failed’ to establish a relevant information and reporting system.”²²

The Court also noted the Board did not extinguish any “substantial likelihood” of Board liability by entering into the separation agreement.²³ Indeed, the Court found Plaintiff’s allegations failed to “support an inference of any [Board] liability exposure, much less a substantial likelihood of liability to identify any potential claims.”²⁴ Finally, the Court explained it is well-established under Delaware law that a general release obtained on behalf of a board of directors in a settlement is not a basis to characterize the settlement as an “interested party transaction.”²⁵

Under the second Aronson prong, the Court held Plaintiff failed to meet the “heavy burden” to support an inference that the Board’s decision to enter into the separation agreement was not a product of valid business judgment.²⁶ Plaintiff argued (i) the Board made a “conscious decision” to allow the former CEO “to decide his own fate,” and (ii) the Board rushed to negotiate and sign the separation agreement after conducting cursory informal meetings without minutes.²⁷

The Court found none of the facts Plaintiff pled showed the CEO was in charge of his own fate. Rather, the facts indicated the opposite: the Board would have taken a different action had the CEO not agreed to the peaceful separation.²⁸ Moreover, the Court explained Plaintiff could not argue, on the one hand, the Board took too long to address the former CEO’s conduct, and on the other hand, the Board acted too quickly in entering into the separation agreement after receiving the investigation report.²⁹ “It is the Board’s prerogative to decide when it had enough information to decide how to separate [the CEO] from the Company—not Plaintiff’s.”³⁰ Importantly, the Court noted none of the shortcomings Plaintiff identified relating to the Board’s actions supported an inference of gross negligence—much less an inference of bad faith or conflicts of interest.³¹

The Court also held Plaintiff did not adequately plead his claims for corporate waste or unjust enrichment.³² The Court of Chancery dismissed the derivative complaint in Shabbouei in its entirety because it fell “well short of” pleading demand futility.

Key Takeaways

• Exculpatory provisions provide powerful protections for directors. Where a corporate charter has an exculpatory provision, as in Shabbouei, a plaintiff must plead with particularity that a majority of the board breached the fiduciary duty of loyalty or acted in bad faith.
• Derivative plaintiffs that fail to make a pre-suit demand on the company’s board of directors must “comply with stringent requirements of factual particularity” as opposed to notice pleading standards.
• Where a plaintiff challenges an affirmative board decision, the Court analyzes demand futility under the Aronson standard, which requires a plaintiff plead particularized facts in support of a reasonable inference that either (i) a majority of the board is interested in the challenged decision, or (ii) the challenged decision was not a product of valid business judgment.

1. See 2020 WL 1609177 (Del. Ch. April 2, 2020).
2. Id. at *3.
3. Id. at *1.
4. Id.
5. Id. at *2 (explaining if the CEO was terminated “for cause,” he would have received “nothing, except his accrued base salary through the date of termination”).
6. Id. at *1.
7. Id.
8. See CT. CH. R. 23.1; see also Shabbouei, 2020 WL 1609177, at *1.
9. See Shabbouei, 2020 WL 1609177, at *5.
10. Id. at *6.
11. Id.; see also Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (explaining, under Rule 23.1, “[t]he Court should draw all reasonable inferences in the plaintiff’s favor …. [However,] conclusory allegations are not considered as expressly pleaded facts or factual inferences”).
12. See Shabbouei, 2020 WL 1609177, at *6.
13. See Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled in part, Brehm v. Eisner, 746 A.2d 244, 253-54 (Del. 2000).
14. See 8 Del. C. § 141(a); see also Shabbouei, 2020 WL 1609177, at *6.
15. See Shabbouei, 2020 WL 1609177, at *6.
16. Id. at *1.
17. See Ellis v. Gonzalez, 2018 WL 3360816, at *6 (Del. Ch. July 10, 2018) (noting the charter contained a Section 102(b)(7) clause exculpating the directors from liability for duty-of-care violations, so the derivative plaintiff had to allege a majority of the board faced a “substantial likelihood of liability for breaching the duty of loyalty”) (emphasis added); see also Shabbouei, 2020 WL 1609177, at *1, *9.
18. See Shabbouei, 2020 WL 1609177, at *9.
19. Id. at *1.
20. Id. at *6 (“[T]he analysis boils down to whether ‘a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.’”).
21. Id. at *8 (“Plaintiff cannot use an unpled failure of oversight claim as the background to well plead that the Board was somehow interested in the Separation Agreement.”).
22. Id. at *7.
23. Id.
24. Id. at *8.
25. Id.
26. Id. at *9-10 (referring to the second Aronson prong as a “frontal attack” on board decisions and focusing the Court’s analysis on the “process” of the Board’s decision, not whether it was “right” or “wrong”).
27. Id.
28. Id. at *11 (explaining nothing in the meeting minutes offered by Plaintiff indicated the Board deferred to the former CEO’s judgment in negotiations).
29. Id. at *11-12 (“[Plaintiff] faces the fruitless task of maintaining credibility while arguing that the Board was too slow to respond to Incident 1, but too fast in its response to Incident 2.”).
30. Id. at *11.
31. Id. at *10.
32. Id. at *13.

Client Alert 2020-282