Shareholders or members often want to take legal action against the managers and directors they believe to be responsible for poor or reckless decisions.

However, when these business disputes over corporate mismanagement spill into the courthouse, a simple, somewhat counterintuitive, question must first be asked: Must the shareholder first ask the directors to sue themselves? This, in legal terms, is called “making a demand.”

The short answer is, almost always, yes.

Maryland has confirmed that before a shareholder sues its corporate leadership for mismanagement (or any other claim asserted on behalf of the corporation) it must make a formal demand that the directors first file suit to address the alleged misconduct. Even if it seems useless.

In an opinion published on July 14, 2026, the Maryland Supreme Court affirmed the dismissal of a stockholder derivative claim[1] for failure to establish that a pre-suit demand would be futile. As discussed below, “futility” in this context is a narrow exception to the demand requirement, which, if satisfied, permits a shareholder to file a suit against corporate directors without making a demand.

Although the opinion articulates the futility standard, it lacks any practical roadmap for doing so, confirming what many have previously said: Although the door is not closed on futility, it is only open a crack.

Summary

Reviewing the argument that it is futile for a shareholder to demand that directors make their corporation sue them personally for $1 billion, the Supreme Court reinforced that potential personal liability does not establish futility.

Instead, to excuse demand, the shareholder-plaintiff must plead particular facts showing why the directors’ review of the (hypothetical) demand would not be performed in good faith, in a manner believed to be in the company’s best interest, and with ordinary prudence.

In other words, unless the stockholder-plaintiff can allege that the directors would not enjoy the business judgment rule in reviewing the demand, then demand will not be excused for futility. The upshot is that Maryland practitioners and litigators should not rely upon futility as a viable way to avoid demand.

Derivative Claims & the Demand Requirement

A derivative lawsuit is an exception to a corporate board’s ability to govern the corporation. It allows shareholders to act as the corporation and sue wrongdoers to recover damages for the corporation.

But to enjoy this great power, the stockholders must surmount substantial hurdles. One of those is the pre-suit requirement to make a demand on the Board for the company to bring the lawsuit itself. If the Board refuses, then the shareholder can proceed with the lawsuit on behalf of the corporation, but it must establish why the Board’s refusal was wrongful.

To do so, the shareholder must confront the daunting business judgment rule, which presumes the Board’s decision is correct (unless the directors had a personal interest in the challenged transaction, exercised bad faith, or acted without ordinary prudence).

The Futility Exception

Alternatively, the stockholder can allege that a demand would be “futile,” and bring suit without a demand. Often stockholders argue that a demand is futile because it would require the directors sue themselves for alleged misconduct that the directors themselves participated in; or that the directors would very likely refuse it. In Nathanson, the plaintiff’s argued, when asked at oral argument, that making a demand would be “wasteful.”

But Maryland law is clear that these are not sufficient bases for futility, and the Nathanson opinion seeks to identify the specific basis.[2]

The Nathanson Holding

Nathanson was a case brought by two stockholders of two investment funds.

Their derivative claim alleged that individual directors breached their duties of care by allowing the funds, through their advisor Tortoise Capital Advisors, LLC, to increase their borrowing to grow the funds’ holdings, with disastrous consequences when crashing energy prices in 2020 caused the funds to violate their required debt-to-asset ratios, which in turn required them to liquidate holdings (at a severely reduced price) to reduce debt, thus realizing huge losses for investors. The derivative claim did not target any “interested transactions” that would be exempt from the business judgment rule.

To argue futility, the stockholders pointed out how a demand would be asking the directors to cause the corporation to sue themselves, for a total of $1 billion. The shareholders also pointed to the director’s post-crash conduct, such as the directors remaining publicly committed to the challenged actions after the resulting losses and eventually opposing the stockholder claims (when they were first brought in other jurisdictions before Maryland).

But the Supreme Court held that these allegations do not demonstrate futility under existing Maryland law; especially because weighing that argument would require an evaluation of the merits to determine if the claims were likely to result in personal liability. Although the stockholders accurately alleged that the directors were likely to refuse the demand, they could only establish futility by pleading (with particularity) that the directors could not consider the demand as their statutory duties would require. The warned against confusing “futility with failure,” meaning that just because a demand is very likely to fail does not mean it is futile.

Specifically, the Supreme Court explained that the futility test is aimed at establishing whether the directors have the “capacity” to evaluate the demand in a way that upholds their duties under Maryland Code, Corporations and Associations § 2-405.1. The Court held that a demand is excused as futile when:

This language is formulated by combining the standard articulated in Werbowsky v. Collomb, the seminal modern Maryland case on demand futility, with the language of § 2-405.1(c). Not only must the Complaint contain particularized facts establishing this lack of “capacity,” the Supreme Court also confirmed that futility can be attacked at the pleading stage or the fact stage, and that it would be an ideal subject of a bifurcation pursuant to Rule 2-502.

In reaching this holding, the Court emphasized how Maryland law honors the decision-making discretion of disinterested directors (which applied to four of the five directors here—as the fifth director was CEO of the advisor itself). The Court also asserted that directors are capable of reconsidering past decisions, and that they often do; and that when shareholders elect to sue without making a demand, the lawsuit is frequently the first notice the directors have that the underlying actions are being challenged.

Further in this same vein of deference, the Court even recognized how a board can make a sound business decision, and uphold its duties, by deciding not to pursue claim that is ultimately “meritorious and valuable,” because (for example) it would cost more than it is worth, distract from more fruitful endeavors, or damage a valuable relationship.

The Court also clarified that the phrase, “personally and directly conflicted or committed to the decision in dispute,” as used in the futility standard, does not mean merely that the directors stood by or defended that decision after its negative consequences. Instead, it refers to the “rare case in which a director’s entanglement is so personal and direct that he cannot weigh a demand to undo or rectify it.” Despite finding that the Complaint did not meet this standard, the opinion offers no concrete factual example of when it would be met.

Overall, the opinion requires derivative claimants to identify particular facts that show why the directors could not possibly have upheld their duties to the corporation when hypothetically reviewing a demand that was never made, while excluding from this consideration the plain fact that the directors are reviewing whether to bring claims against themselves. The Nathanson plaintiffs offered other types of facts, but all were rejected as insufficient.

Lesson for Practitioners

The lesson of Nathanson seems to be that futility is elusive, if not impossible, when the majority of directors were not personally interested in the action or decision being challenged. In that scenario, it is difficult to imagine facts that could be pled to show that the directors could not possibly consider the decision in good faith, in a manner they believe to serve the corporation’s best interests, and with ordinary prudence; especially if the threat of financial ruin (as in Nathanson, where the demand sought to hold them liable for $1 billion in losses) does not suffice to establish that as being impossible.

Even if particular facts were pled, they would need to satisfy this exacting standard, which makes that tactic all the more risky. If demand would truly be “wasteful” or even prejudicial to a material degree, stockholder-plaintiffs should seek to trigger the “irreparable harm” alternative standard.

When considering how this articulation keeps futility alive but presents little realistic hope of establishing it, the Supreme Court’s reiteration of its prior statement, that only the General Assembly can repeal the futility exception, seems to be telling. Unable to eliminate the exception, the Court has narrowed it to more of a theoretical possibility than a viable avenue for derivative claimants.

This seems to be true at least where the majority of directors were not interested in the underlying action. Then again, even an interested board might be able to review a demand “within the ambit of the business judgment rule” through a disinterested special litigation committee, which raises its own issues and burdens when used as the mechanism to refuse a demand.

Hayes Edwards and Jase Tilley advise clients on both sides of corporate disputes regarding control, mismanagement, self-dealing, interested transactions, minority shareholder rights, damages claims, shareholder oppression, and related issues. As derivative claims are usually brought among a basket of other claims, including direct claims as well, stockholders and boards would be well-served to seek counsel as early as possible to protect and pursue their rights.

You can reach Hayes at 301-841-0191 or by email at hedwards@lerchearly.com and Jase at 301-657-2719 or by email at jbtilley@lerchearly.com.

[1]              Although this case concerns a corporation, Maryland law provides that the rights, and obligations, regarding derivative claims apply equally to LLC’s and their members and managers.

[2]               There is a second, less-controversial basis for futility: when the requirement to make a demand and wait for a response would result in irreparable harm to the corporation. That basis remains available and is not affected by Nathanson.