Grimes v. Donald

Facts:

• D had an employment agreement and P filed an action against the board of directors to invalidate it.
• The agreement with D would run until he was 75 years old and would provide salary, incentives, and health insurance.
• Importantly, the agreement gave D the “general management of the affairs of the company” and stated that the D would receive a very generous retirement package if he was “constructively terminated.”

  • The agreement, however, defined constructive termination as any interference from the board in running the company. So in effect, the agreement gave D full ability to run the company as he saw fit, and if that were ever violated he’d be entitled to a generous retirement package.

• P wrote to the board demanding that the agreement be invalidated.
• The board responded stating that a third party helped construct the agreement and that under their interpretation the board still maintained general management capabilities.
• Thereafter, P filed a lawsuit against the board.

Issue:

• Whether P’s demand letter waives his right to file a suit against the board, claiming their lack of independence in evaluating his demand.

Holding:

• P’s suit is dismissed.
• By making the demand P waived his right to contest any independence of the board.

  • If P had filed the lawsuit against the board personally as opposed to derivatively, he would have been able to contest the board’s independence. By making the demand, he brought suit derivatively – where he derived his harm via his standing as a shareholder.
  • He could have claimed “futility” and sued personally by saying that making a demand to the board was futile because they were not an independent decision making body.

• The demand is a tool used by corporations (sometimes mandated under state law) to avoid further litigation. However, it wouldn’t serve that purposes whatsoever if the P were allowed to make a demand and then after the fact claim there was no independence of the board. The P needs to claim “futility” prior to making any demand.

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