WA Supreme Court Holds WA is Demand Futility State and Follows Delaware Law
The Washington Supreme Court ruled today that Washington follows the Delaware “demand futility” rule for shareholder derivative claims. The court was answering a certified question in a case filed in the US District Court for the Western District of Washington involving option backdating at a Washington corporation, In re F5 Networks, Inc.,
Shareholders may bring a derivative suit without making a demand on the board of directors if there is a reasonable doubt that the board could exercise “its independent and disinterested business judgment in responding to demand.” Reasonable doubt will be present and demand excused if under particularized facts it is doubtful that 1) the directors are disinterested and independent, and 2) the challenged transaction was the product of a valid exercise of business judgment.
The court reached this holding by analyzing RCW 23B.07.400(2), the shareholder derivative suit demand provision, and the fact that Delaware courts are well versed in this matter -- more than half of publicly traded corporations and sixty (60) percent of Fortune 500 companies are incorporated in Delaware.
The court also held that the reasoning in Ryan v. Gifford, a Delaware case finding demand futile in an option backdating claim based upon circumstantial evidence, applied to the F5 Networks claim.
Although the opinion only follows Delaware law on the demand futility standard, if the Washington statutory scheme is similar to that of Delaware in another area – given the reasoning that Delaware courts are well versed in corporate law – it seems reasonable to rely on Delaware case law in cases involving Washington corporations.
