          United States Court of Appeals
                     For the First Circuit


No. 11-1605

 UNIÓN DE EMPLEADOS DE MUELLES DE PUERTO RICO PRSSA WELFARE PLAN,
 individually and on behalf of all others similarly situated, and
derivatively on behalf of PUERTO RICO FIXED INCOME FUND II, INC.,
PUERTO RICO FIXED INCOME FUND III, INC., PUERTO RICO FIXED INCOME
  FUND IV, INC., and TAX-FREE PUERTO RICO FUND II, INC., UNIÓN DE
EMPLEADOS DE MUELLES DE PUERTO RICO AP WELFARE PLAN, individually
 and on behalf of all others similarly situated, and derivatively
 on behalf of PUERTO RICO FIXED INCOME FUND II, INC., PUERTO RICO
  FIXED INCOME FUND III, INC., PUERTO RICO FIXED INCOME FUND IV,
           INC., and TAX-FREE PUERTO RICO FUND II, INC.,

                     Plaintiffs, Appellants,

                               v.

UBS FINANCIAL SERVICES INC. OF PUERTO RICO; UBS TRUST COMPANY OF
   PUERTO RICO; MIGUEL A. FERRER; CARLOS V. UBIÑAS; STEPHEN C.
     ROUSSIN; LESLIE HIGHLEY, JR.; MARIO S. BELAVAL; AGUSTÍN
   CABRER-ROIG; GABRIEL DOLAGARAY-BALADO; CARLOS NIDO; LUIS M.
        PELLOT-GONZÁLEZ; VICENTE J. LEÓN; CLOTILDE PÉREZ;
                        DOES 1 THROUGH 100,

                     Defendants, Appellees,

                               v.

PUERTO RICO FIXED INCOME FUND II, INC.; PUERTO RICO FIXED INCOME
FUND III, INC.; PUERTO RICO FIXED INCOME FUND IV, INC.; TAX-FREE
                   PUERTO RICO FUND II, INC.,

                       Nominal Defendants.


          APPEAL FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF PUERTO RICO

        [Hon. Aida M. Delgado-Colón, U.S. District Judge]
                              Before

                  Howard, Lipez, and Thompson,
                         Circuit Judges.


     Jay W. Eisenhofer, with whom Mary S. Thomas, Cynthia A.
Calder, Grant & Eisenhofer P.A., Harold D. Vicente-Gonzalez, Harold
D. Vicente-Colon, Vicente & Cuebas, Douglas R. Hirsch, Charles H.
Dufresne, Jr., Sadis & Goldberg LLP, Mark C. Gardy, James S. Notis,
Kelly A. Noto, and Gardy & Notis, LLP were on brief, for appellant.
     Paul J. Lockwood, with whom Nicole A. DiSalvo, Skadden, Arps,
Slate, Meagher & Flom LLP, Salvador J. Antonetti-Stutts, Mauricio
O. Muñiz-Luciano, Ubaldo M. Fernández-Barrera, and O'Neill & Borges
were on brief, for appellees UBS Financial Services Inc. of Puerto
Rico, UBS Trust Company of Puerto Rico, Miguel A. Ferrer, Carlos V.
Ubiñas, Stephen C. Roussin, and Leslie Highley, Jr.
     Rafael Escalera Rodríguez, Pedro Santiago, and Reichard &
Escalera on brief for appellees Mario S. Belaval, Agustín Cabrer-
Roig, Gabriel Dolagaray-Balado, Carlos Nido, Luis M. Pellot-
González, Vicente J. León, and Clotilde Pérez.
     Jose C. Sánchez-Castro and Pirillo Hill González & Sánchez PSC
on brief for nominal defendants.


                         January 4, 2013
           LIPEZ, Circuit Judge.         A shareholder derivative action

permits a shareholder of a corporation to bring suit to enforce

rights the corporation is unable or unwilling to enforce on its own

behalf.    See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95

(1991).    However, to prevent abuse of this procedural device, a

shareholder seeking to assert a cause of action belonging to the

corporation must state with particularity in the complaint either

that the corporation declined to protect its own interests after

suitable demand was made on the board of directors or that such a

demand would have been futile.             See Gonzalez Turul v. Rogatol

Distribs., Inc., 951 F.2d 1, 2 (1st Cir. 1991).             This case raises

important questions concerning the circumstances in which, under

the applicable law, a presuit demand is considered futile.

           Plaintiff-Appellants Unión de Empleados de Muelles de

Puerto Rico AP Welfare Plan ("AP") and Unión de Empleados de

Muelles de Puerto Rico PRSSA Welfare Plan ("PRSSA") are Puerto Rico

pension plans that own shares in closed-end investment funds ("the

Funds") advised by UBS Trust Company of Puerto Rico ("UBS Trust"),

a subsidiary of the Swiss financial giant UBS AG.               In 2008, UBS

Trust,    acting    as    the   Funds'   investment      adviser,   purchased

approximately      $757   million   worth   of   bonds   from   a   series   of

issuances underwritten by UBS Financial Services Incorporated of

Puerto Rico ("UBS Financial"), another UBS AG affiliate, and then

sold these bonds to the Funds.       As a consequence, the Funds were so


                                     -3-
heavily invested in these bonds that they suffered significant

losses when the value of these bonds soon depreciated.

          Plaintiffs brought a shareholder derivative action in

federal district court against the Funds' directors, UBS Trust, and

UBS Financial, who jointly filed a motion to dismiss plaintiffs'

claims.   The district court granted the motion to dismiss on the

ground that no presuit demand had been made on the Funds' boards of

directors, and plaintiffs had failed in their complaint to state

with particularity the reasons such a demand would have been

futile.   After careful consideration, we vacate the dismissal of

the derivative claims and remand for further proceedings.

                                I.

          The following facts, which we take as true, are drawn

from the allegations in the complaint.   See In re Sonus Networks,

Inc., 499 F.3d 47, 66 (1st Cir. 2007).

          Plaintiff AP owns shares of four investment funds: the

Puerto Rico Fixed Income Fund II, Inc. ("Fund II"), the Puerto Rico

Fixed Income Fund III, Inc. ("Fund III"), the Puerto Rico Fixed

Income Fund IV, Inc. ("Fund IV"), and the Tax-Free Puerto Rico Fund

II, Inc. ("Tax-Free Fund").   Plaintiff PRSSA owns shares of Fund

II, Fund III, and Fund IV.    Though these four funds are separate

investment companies, the board of directors for each fund has an




                                -4-
identical composition.1 We refer to these four funds collectively

as the "Funds."

          Each    of   the   Funds    is   a   closed-end   fund,   and   is

incorporated under the laws of Puerto Rico.2        Generally, such funds

fall under the purview of the Investment Company Act of 1940 ("the

40 Act"). The funds in this case, however, are unusual in that they

are exempt from the 40 Act under section 6(a)(1), which provides an

exemption for certain funds organized in Puerto Rico, so long as

securities issued by that fund are sold only to residents of Puerto

Rico. See 15 U.S.C. § 80a-6(a)(1). To ensure that shares of these

exempt funds are sold only to residents of Puerto Rico, the

securities they issue contain special restrictions on how and to

whom shares of these funds can be transferred or sold. As a

consequence, the pool of potential buyers for these funds is

smaller than the pool available to a typical large, closed-end

mutual fund.

          UBS Trust, through its UBS Asset Managers Division,

serves as the investment adviser and administrator for the Funds.



     1
        "Unlike other corporations, investment companies are
typically created and managed by pre-existing entities known as
investment advisers." Verkouteren v. Blackrock Fin. Mgmt. Inc., 37
F. Supp. 2d 256, 258 (S.D.N.Y. 1999)
     2
       A closed-end fund is "[a] mutual fund having a fixed number
of shares that are traded on a major securities exchange or an
over-the-counter market." Black's Law Dictionary 1116 (9th ed.
2009).


                                     -5-
As compensation for these services, UBS Trust is entitled to an

annual administrative fee of .15% and an advisory fee of .75%, of

the average weekly gross assets of the Funds.

               UBS Trust is an affiliate of, and shares officers with,

UBS Financial, a broker-dealer registered with the Securities and

Exchange Commission ("SEC").              Since 2007, UBS Financial has served

as    a    financial     adviser     to    Puerto    Rico's     troubled    Employee

Retirement System ("ERS"), which is a public retirement system

maintained      by     the   government     of   Puerto   Rico for    its    278,000

retirees and employees.

               During the first half of 2008, UBS Financial underwrote

$2.9 billion of bonds issued by ERS.                Because an underwriter buys

bonds from an issuer and resells them to investors, with the

difference between the purchase price paid by the underwriter to

the issuer and the resale price accounting for the underwriter's

profit or loss, see John P. Lucas, Pruning the Antitrust Tree:

Credit Suisse Securities (USA) LLC v. Billing and the Immunization

of the Securities Industry from Antitrust Liability, 59 Mercer L.

Rev. 803, 804 (2008); see also In re Scottish Re Group Sec. Litig.,

524       F.   Supp.    2d    370,   400-401        (S.D.N.Y.    2007)     (defining

"underwriter" for purposes of the Securities Act of 1933), UBS

Financial's profits from these offerings were contingent upon

finding investors willing to buy the ERS bonds at a premium above

the price UBS Financial had paid ERS.


                                           -6-
           The ERS bonds were offered for purchase in three series:

Series A in January 2008; Series B in May 2008; and Series C in

June 2008. When there was little global interest in the Series A

offering of the ERS bonds, ERS and UBS Financial abandoned their

initial plans to offer Series B outside of the Puerto Rico market.

Nevertheless, UBS Trust purchased nearly $1.5 billion worth of the

ERS bonds from UBS Financial and then resold them to the funds it

advises, with approximately $757 million worth of the bonds sold to

the Funds at issue in this case. Not only did UBS Trust purchase

more than half of the entire multi-billion dollar offerings, UBS

Trust purchased nearly $850 million, or 85%, of the Series B bonds.

As a result of these purchases, the ERS bonds accounted for more

than thirty percent of the assets of Funds II, III, and IV and

approximately fifteen percent of Tax-Free Fund II.3            For its role

in   bringing   the   bonds   to   market,   UBS   Financial    shared   in

underwriters' fees of $27 million.4

           Within one year of issuance, the ERS bonds lost ten

percent of their value, dragging down the worth of the Funds.            In

response, and without first demanding corrective action from the


     3
       To summarize the travel of the bonds: ERS sold the bonds to
its underwriter, UBS Financial, which in turn sold them to UBS
Trust and other buyers. UBS Trust then sold the bonds it had
purchased to the funds it advises, including the Funds at issue in
this case. Plaintiffs in this case are institutional investors in
the Funds.
     4
       The complaint does not indicate who the other underwriters
were or what percentage of the total fees UBS Financial received.

                                    -7-
Funds'    boards   of    directors,      plaintiffs    filed    a    shareholder

derivative suit in February 2010 in federal district court against

the Funds' directors, UBS Trust, and UBS Financial. The complaint

alleged that the institutional defendants engaged in a scheme of

manipulative trading whereby they used the Funds to manufacture the

appearance of market interest in the bonds and drive up the price

other investors were willing to pay for them.            Plaintiffs asserted

derivative   claims     under    Rule    10-b5   and   Section 10(b)      of    the

Exchange Act against UBS Trust and UBS Financial, derivative claims

under Section 20(a) of the Exchange Act against certain directors

individually, and derivative claims under Section 12(a)(2) of the

Securities Act against UBS Trust and UBS Financial.5 The complaint

also stated that a presuit demand would have been futile.

            Appellees moved to dismiss the derivative claims on the

ground that plaintiffs had inadequately pleaded demand futility.

In   opposing   the     motion   to     dismiss,   plaintiffs       requested   an

opportunity to cure any deficiencies in the complaint by filing an

amended complaint if the district court were inclined to dismiss

any or all of their claims.




      5
       In addition to their derivative claims, plaintiffs asserted
direct claims against UBS Trust and UBS Financial on behalf of a
putative class of shareholders for breach of ERISA fiduciary duties
and violations of the duty of good faith. These direct claims were
dismissed by the district court pursuant to Federal Rule of Civil
Procedure 12(b)(6). Their dismissal is not challenged on appeal.

                                        -8-
           The district court did not afford plaintiffs any such

opportunity.   Instead, it dismissed plaintiffs' derivative claims

without prejudice for failure to properly plead demand futility.

When plaintiffs sought leave to file an amended complaint, the

district court denied plaintiffs' motion, citing our holding in

Fisher v. Kadant, Inc. that "once judgment has entered, the case is

a dead letter, and the district court is without power to allow an

amendment to the complaint because there is no complaint left to

amend."   589 F.3d 505, 509 (1st Cir. 2009).   This appeal followed,

challenging both the dismissal of plaintiffs' derivative claims and

the denial of their motion to amend.

                                II.

           We must address a threshold question in this case about

the standard of review that applies to a district court's dismissal

of a shareholder derivative action based on a failure to properly

plead demand futility. Our decisions have left this question open.

See, e.g., Gonzalez Turul, 951 F.2d at 1, 3 (holding that district

court should have dismissed derivative suit but not discussing

standard of review); In re Kauffman Mut. Fund Actions, 479 F.2d

257, 263, 267 (1st Cir. 1973) (affirming dismissal of derivative

suit without describing standard of review).    The closest we have

come to setting forth the applicable standard of review was in Heit

v. Baird, where we noted that the district court had not "abused

its discretion" in dismissing a shareholder derivative action. 567


                                -9-
F.2d 1157, 1161 (1st Cir. 1977).    However, we also determined for

ourselves in Heit that the pleadings were inadequate without any

discernible deference to the district court's conclusions, and our

holding said only that dismissal of the case was "proper," id. at

1162, appearing to abjure a more deferential standard of review.

Our view that Heit did not establish the governing standard in this

circuit is confirmed by the conspicuous absence in our subsequent

decisions of any statement to that effect. See Gonzalez Turul, 951

F.2d at 2 (citing Heit but no mention of standard of review);

Marquis Theatre Corp. v. Condado Mini Cinema, 846 F.2d 86, 90-91

(1st Cir. 1988) (same); Grossman v. Johnson, 674 F.2d 115, 123 (1st

Cir. 1982) (same); Untermeyer v. Fid. Daily Income Trust, 580 F.2d

22, 23 (1st Cir. 1978) (same).

          Other courts of appeals have traditionally reviewed the

dismissal of a derivative suit based on a failure to properly plead

demand futility for abuse of discretion.      See, e.g., Potter v.

Hughes, 546 F.3d 1051, 1056 (9th Cir. 2008); Kanter v. Barella, 489

F.3d 170, 175 (3d Cir. 2007).    Recently, however, there have been

expressions of skepticism regarding the appropriateness of this

standard from the Second Circuit, see Kautz v. Sugarman, 456 F.

App'x 16, 18 (2d Cir. 2011); Scalisi v. Fund Asset Mgmt., L.P., 380

F.3d 133, 137 n.6 (2d Cir. 2004), the Ninth Circuit, see Israni v.

Bittman, 473 F. App'x 548, 550 n.1(9th Cir. 2012); Laborers Int'l

Union of N. Am. v. Bailey, 310 F. App'x 128, 130 n.1 (9th Cir.


                                 -10-
2009), and the D.C. Circuit, see Pirelli Armstrong Tire Corp.

Retiree Med. Benefits Trust v. Raines, 534 F.3d 779, 783 n.2 (D.C.

Cir. 2008).      As the Second Circuit has observed, the abuse of

discretion standard is incongruous in this context: "[W]hen a trial

court rules on the legal sufficiency of a complaint the question

presented should be one of law.     When an appellate court reviews

such a ruling, review should be de novo." Scalisi, 380 F.3d at 137

n.6.

           State courts have trended even more strongly toward

plenary review.     In 2000, the Delaware Supreme Court expressly

adopted a de novo standard of review, explaining that the nature of

its analysis of a complaint in a derivative suit is no different

than that of a lower court.      See Brehm v. Eisner, 746 A.2d 244,

253-54 (Del. 2000).      The highest courts of other states have

followed suit.    See Fink v. Codey (In re PSE & G S'holder Litig.),

801 A.2d 295, 313 (N.J. 2002); Harhen v. Brown, 730 N.E.2d 859, 866

(Mass. 2000) (same).

           We are persuaded by the reasoning in these cases.       As a

general   matter,   rulings   concerning   the   legal   sufficiency   of

pleadings are reviewed de novo.     See Giragosian v. Ryan, 547 F.3d

59, 63 (1st Cir. 2008). There is no justification for treating the

pleadings in a derivative suit differently. A district court is no

better positioned than we are to read and evaluate a complaint in

this sort of action.   See Brehm, 746 A.2d at 253-54.      Accordingly,


                                 -11-
we now hold that a district court's dismissal of a shareholder

derivative   suit   based    on a   failure    to   properly   plead   demand

futility is subject to de novo review.

                                    III.

            Federal Rule of Civil Procedure 23.1 sets forth the rule

of pleading requiring a shareholder filing a derivative action to

allege with particularity either that a satisfactory presuit demand

was presented to, and refused by, the board of directors or the

reasons such a demand would have been futile.                  However, the

circumstances in which a demand is required or, conversely, excused

are determined by reference to the law of the state in which the

corporation is incorporated.        See Gonzalez Turul, 951 F.2d at 1 &

n.3; cf. Kamen, 500 U.S. at 96-97 ("Rule 23.1 . . . does not create

a demand requirement of any particular dimension.").           That is, the

federal rule merely requires that the complaint allege sufficient

facts to enable a federal court to decide whether, as a matter of

state substantive     law,   a   presuit    demand was    necessary.     See

Halebian v. Berv, 590 F.3d 195, 211 (2d Cir. 2009).

            Because the Funds are Puerto Rico corporations, Puerto

Rico law ordinarily would inform our analysis as to whether a

demand was excused in this case.           However, Puerto Rico law "does

not specifically elaborate the requirements of demand or when it is

excused."    Gonzalez Turul, 951 F.2d at 3 n.4.          Hence, we look to




                                    -12-
Delaware corporate law, on which Puerto Rico corporate law is

modeled.      See id.; Marquis Theatre, 846 F.2d at 91.

              Through its opinions in Aronson v. Lewis, 473 A.2d 805

(Del. 1984), overruled on other grounds by Brehm, 746 A.2d at 253-

54, and Rales v. Blasband, 634 A.2d 927 (Del. 1993), the Delaware

Supreme Court has established two interrelated tests for demand

futility. "In simple terms, these tests permit a corporation to

terminate a derivative suit if its board is comprised of directors

who can impartially consider a demand." In re Oracle Corp. Deriv.

Litig.,      824    A.2d      917,    939   (Del.    Ch.     2003).     Which    test   is

appropriate        in   a     given    case     depends    on    the    nature    of    the

plaintiff's allegations against the board: Rales applies where the

plaintiff challenges a board's failure to discharge its oversight

duties, while Aronson applies where the plaintiff alleges that the

board   as    a    whole      has    made   a    conscious      business   decision      in

violation of its fiduciary duties.                   See Rales, 634 A.2d at 933

("The essential predicate for the Aronson test is the fact that a

decision of the board of directors is being challenged in the

derivative suit."); see also Wood v. Baum, 953 A.2d 136, 140 (Del.

2008) ("The Aronson test applies to claims involving a contested

transaction."); In re Baxter Int'l, Inc. S'holders Litig., 654 A.2d

1268,   1269       (Del.    Ch.      1995)(holding    that      Rales    applies    where

plaintiffs        "do   not    challenge        directors'      exercise   of    business

judgment").


                                            -13-
           In the instant case, plaintiffs do not allege that the

boards of each of the Funds made a formal, direct decision to

purchase   the   ERS   bonds.   Rather,   as   is    common   practice,   the

directors delegated the authority to make investment decisions on

behalf of the Funds to the investment adviser, here UBS Trust.

Acting as investment adviser, UBS Trust then executed the purchases

of ERS bonds from UBS Financial and placed them with the Funds. The

Rales standard is thus the best fit for this case. See Rales, 634

A.3d at 933-34 (noting Aronson is inappropriate "where the subject

of the derivative suit is not a business decision of the board");

In re Mut. Funds Inv. Litig., 384 F. Supp. 2d 873, 878 (D. Md.

2005)(applying Delaware law and concluding that Rales was more

appropriate in the mutual fund context).

           For a plaintiff to succeed under Rales, she must allege

particularized facts creating "a reasonable doubt that, as of the

time the complaint is filed, the board of directors could have

properly exercised      its   independent   and     disinterested   business

judgment in responding to a demand." Rales, 634 A.2d at 934.

Applying this test, we look to the individual directors rather than

the board as a whole, and excuse demand "only if a majority of the

board members are interested or lack independence." In re Sonus

Networks, 499 F.3d at 67 (citing Rales, 634 A.2d at 930). A

director is interested "whenever divided loyalties are present, or

where the director will receive a personal financial benefit from


                                   -14-
a transaction that is not equally shared by the stockholders, or

when a corporate decision will have a 'materially detrimental

impact' on a director but not the corporation or its stockholders."

In re Verisign, Inc. Deriv. Litig., 531 F. Supp. 2d 1173, 1189

(N.D. Cal. 2007) (quoting Rales, 634 A.2d at 936).             Similarly, a

director's independence may be compromised if he or she is so

personally or financially beholden to an interested person, or an

interested entity, that "his or her discretion [is] sterilized."

Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845

A.2d 1040, 1050 (Del. 2004) (quoting Aronson, 473 A.2d at 816)

(internal quotation marks omitted); see also Orman v. Cullman, 794

A.2d 5, 25 n.50 (Del. Ch. 2002) (explaining that the independence

inquiry "involves an inquiry into whether the director's decision

resulted from that director being controlled by another"); Aronson,

473 A.2d at 816 ("Independence means that a director's decision is

based on the corporate merits of the subject before the board

rather than extraneous considerations or influences.").                 Though

disinterest    and   independence     are    separate    concepts,   "similar

factual   circumstances       may     implicate      both    interest     and

independence." Orman, 794 A.2d at 25 n.50.

          In     evaluating     the         directors'    disinterest      and

independence, Delaware courts have understood Rales to signal a

kind of realism in analyzing the human dynamics at play in a

director's relationships. See Mizel v. Connelly, No. 16638, 1999 WL


                                    -15-
550369, at *3 n.1 (Del Ch. Aug. 2, 1999) (describing the Rales

standard as a "pragmatic, realist approach"); Steiner v. Meyerson,

No. 13139, 1995 WL 441999, at *10 (Del. Ch. July 19, 1995)

("Realism of the kind signaled by Rales requires one to acknowledge

the possibility that a partner at a small law firm bringing in

close to $1 million in revenues from a single client in one year

may   be   sufficiently   beholden    to,   or   at   least   significantly

influenced by, that client as to affect the independence of his

judgment.").

            Turning to the instant case, we find that the district

court's analysis of whether plaintiffs had established demand

futility was flawed in two significant ways. First, in analyzing

each director, the district court focused too narrowly on whether

plaintiffs had alleged that the individual directors received a

financial benefit from the ERS bonds transaction. Alleging the

receipt of a personal financial benefit is not the sine qua non of

demand futility. Rather, Rales requires the trial court to analyze

more broadly the facts alleged concerning the circumstances of each

director to determine whether plaintiffs have created a reasonable

doubt that the director could objectively evaluate demand "without

regard for" inappropriate influences. Aronson, 473 A.2d at 815. In

other words, the district court should have considered whether

plaintiffs had pled facts sufficient to demonstrate that each

director   has   such   significant   connections     to   the   defendants,


                                  -16-
whether personal, financial, or otherwise, that he could not

"impartially consider [demand] without being influenced by improper

considerations." Rales, 634 A.2d at 934.

           Second,   the    district     court   misconstrued   plaintiffs'

burden of demonstrating that the benefits –- financial or otherwise

-– that the individual directors received from their place in the

constellation of relationships between UBS Financial and UBS Trust

were of "subjective material significance" as required under Orman,

794 A.2d at 25 n.50.          To demonstrate subjective materiality,

plaintiffs in a shareholder derivative suit "need not [offer]

conclusive evidence of the materiality," but they must "provide the

Court with some particulars from which it could reasonably be

inferred   that   [the     director's]    objective   judgment    would   be

impaired." MCG Capital Corp. v. Maginn, No. 4521-CC, 2010 WL

1782271, at *20 (Del Ch. May 3, 2010) (emphasis supplied). In

reviewing the disinterest and independence of each individual

director in this case, however, the district court repeatedly

declined to make such reasonable inferences of materiality from the

facts alleged by plaintiffs. For example, the district court

concluded that the allegations that one director was CEO of both

institutional defendants did not raise a reasonable doubt about his

ability to independently evaluate demand in this case because these

facts were insufficient to establish that these positions were

"subjectively material." In looking for more conclusive evidence of


                                   -17-
materiality, the court overstated the burden plaintiff bears, and

ignored the type of information available to plaintiffs at the

pleading   stage.   See   Rales,   634    A.2d    at     934   (reasoning   that

plaintiffs should not be saddled with an "extremely onerous burden

to meet at the pleading stage without the benefit of discovery").

At best, plaintiffs can only plead the particular facts of each

director's public circumstances. It is then up to the court to

evaluate the facts alleged regarding each individual director in

light of common sense and practical experience in drawing an

inference of subjective materiality.

                                    IV.

           With these errors in mind, we turn to the individual

directors. As noted, each of the Funds is overseen by an identical

eleven-member   board     of   directors.        Thus,    for   plaintiffs    to

establish demand futility, the complaint must create a reasonable

doubt that at least six of the directors were not disinterested and

independent under the Rales standard at the time of filing. Because

Delaware law requires a plaintiff pleading demand futility to

"allege facts as to the interest and lack of independence of the

individual members of that board," we examine the facts plead

concerning each director separately. Orman, 794 A.2d at 22.6



     6
       In our discussion of the individual directors, we rely on
the facts alleged in the complaint. For the purposes of our demand
futility analysis, we take these facts as true. See In re Verisign,
Inc., 531 F. Supp. 2d at 1187.

                                   -18-
A.   The Individual Directors

1. Leslie Highley, Jr.7

           We begin with the most straightforward case. Plaintiffs

allege and defendants do not contest that Leslie Highley, Jr. is an

insider with extensive ties to UBS AG affiliates. In addition to

being a director of each Fund, Highley is an executive employee of

both UBS Trust, where he is Managing Director and Executive Vice

President, and UBS Financial, where he is Senior Vice President.

For several years, Highley has also acted on behalf of UBS Trust as

portfolio manager for several of the Funds. In other words, Highley

is involved at a high level with both institutional defendants. The

district court correctly held that these facts alone are sufficient

to create a reasonable doubt that he could be disinterested and

independent in evaluating plaintiffs' demand in this case. See

Orman, 794 A.2d at 25 n.50.


     7
       Four directors – Highley, Ferrer, Ubiñas, and Roussin – are
defendants in this suit in their individual capacity for alleged
violation of section 20(a) of the Exchange Act. Though this
personal liability claim might seem strong support for the
proposition that they could not evaluate demand with disinterest
and independence, the Delaware Supreme Court noted in Aronson that
"the mere threat of personal liability for approving a questioned
transaction, standing alone, is insufficient to challenge either
the independence or disinterestedness of directors." 473 A.2d at
815. Later decisions have interpreted Aronson to mean that only a
"substantial likelihood of personal liability" is enough to
establish demand futility. See, e.g., Wood, 953 A.2d at 141 n.11.
Because we find there are significant alternative factual
allegations to establish that a majority of the board was not
independent and disinterested, we pass no judgment as to whether
the allegations against the individual directors create a
"substantial likelihood of personal liability."

                                -19-
2. Miguel Ferrer

          Plaintiffs allege that Miguel Ferrer serves as both

Chairman and President of the Board of Directors of each of the

four Funds. At the time of the ERS bond offering, Ferrer was also

the Chief Executive Officer of both UBS Trust and UBS Financial.

Before the complaint was filed, Ferrer concluded his employment

with both UBS Financial and UBS Trust, but he did not leave the UBS

AG family. Instead, at the time the complaint was filed, Ferrer was

the Chairman of yet another UBS-affiliated entity known as UBS

International & Puerto Rico ("UBS International").

          Though the district court was correct in its ultimate

conclusion that plaintiffs had created a reasonable doubt about

Ferrer's ability to objectively evaluate demand, it improperly

considered Ferrer's circumstances at the time of the ERS bonds

transaction. By contrast, Rales requires the court to consider the

facts pleaded concerning each director's circumstances at the time

the complaint was filed.     See Rales, 634 A.2d at 933-34 ("[A] court

must   determine   whether    or    not    the   particularized     factual

allegations   of   a   derivative    stockholder    complaint     create   a

reasonable doubt that, as of the time the complaint is filed, the

board of directors could have properly exercised its independent

and disinterested business judgment in responding to a demand."

(emphasis supplied)).




                                    -20-
             Considering only the facts alleged concerning Ferrer's

circumstances at the time the complaint was filed, we conclude that

plaintiffs have established a reasonable doubt that Ferrer could

have exercised his "independent and disinterested business judgment

in responding to a demand." Rales, 634 A.2d at 934. Even though

Ferrer was no longer a full-time employee at UBS Trust and UBS

Financial, his extensive past ties to both UBS Trust and UBS

Financial are important factors in our analysis. See Krantz v.

Fidelity Mgmt. & Research Co., 98 F. Supp. 2d 150, 156 (D. Mass.

2000) (citing with approval ten factors set out by the SEC relevant

to determination of control over directors which included "former

business associations between the director and the controlling

person"); In re Trump Hotels S'Holder Deriv. Litig., Nos. 96 Civ.

7820, 8527, 2000 WL 1371317, at *9 (S.D.N.Y. Sept. 21, 2000)

("[Director's] history of personally beneficial affiliation with

Trump-controlled entities . . . diminishes the possibility that

[he] had only the corporation's interests in mind when evaluating

the transaction."). In particular, Ferrer's ability to leave his

former UBS positions and assume a new role at a different UBS

affiliate suggests that Ferrer has been able to leverage the

relationships and goodwill he has built in the UBS family of

companies into advancing his career. Given this history, we agree

with   the   district   court   that   plaintiffs   have   established   a

reasonable doubt that Ferrer could objectively evaluate the demand.


                                  -21-
3.   Carlos Ubiñas

           According to the facts alleged in plaintiffs' complaint,

Carlos Ubiñas is Vice Chairman of the Board of Directors and

Executive Vice President of each of the Funds. Like Highley and

Ferrer, Ubiñas serves in multiple executive positions at UBS AG

affiliates. Since 2005, Ubiñas has been the President of UBS

Financial, the institutional defendant that received substantial

remuneration for its services as a financial advisor to ERS and

shared in $27 million in underwriting fees for its role as lead

underwriter for the $2.9 billion bond offering at the heart of this

dispute. He is also currently the CEO of UBS International, the

same UBS AG affiliate where his fellow director Ferrer is Chairman.

           As both president of defendant UBS Financial and a

director of each Fund, Ubiñas's loyalties would necessarily be

divided in evaluating plaintiffs' demand between his obligations to

the Funds and his obligations to UBS Financial. See In re Verisign,

Inc., 531 F. Supp. 2d at 1189 ("Directorial 'interest' exists

whenever divided loyalties are present. . . ."). Similarly, as

President of UBS Financial and CEO of another UBS AG affiliate,

Ubiñas is beholden to the UBS defendants. See In re NutriSystem,

Inc. Deriv. Litig., 666 F. Supp. 2d 501, 515 (E.D. Pa. 2009)

("Delaware courts have found that directors . . . lack independence

because   of   their   substantial   interest   in   retaining   their

employment."); In re The Student Loan Corp. Deriv. Litig., 2002 WL


                                -22-
75479, at *3 & n.3 (concluding that directors who "owe their

livelihood" to institutional defendant could not consider demand

without     "ponder[ing] the effect affirmative action on a demand

would have on [their] future"); see also Rales, 634 A.2d at 937;

Mizel, 1999 WL 550369, at *3 (finding directors lacked independence

where they could not "consider the demand on its merits without

also pondering whether an affirmative vote would endanger their

continued employment").

            The   district   court    concluded   that these facts were

insufficient to establish a reasonable doubt that Ubiñas could

evaluate demand objectively.          We disagree.      Viewing the facts

alleged concerning Ubiñas's circumstances as a whole, we conclude

that plaintiffs have created a reasonable doubt that Ubiñas could

"impartially consider [the] merits" of bringing a lawsuit alleging

that his employer, UBS Financial, engaged in an unlawful scheme

"without being influenced by improper considerations." Rales, 634

A.2d at 934.

4. Stephen Roussin

            Like Ubiñas, Stephen Roussin is a Director of each of the

Funds and a full-time employee of UBS Financial, where he is the

Managing Director. For the same reasons discussed in relation to

Ubiñas, we conclude that plaintiffs have plead sufficient facts to

raise   a   reasonable   doubt   as    to   Roussin's   independence   and

disinterest in evaluating the demand.


                                     -23-
5. Mario Belaval

            According to the allegations in plaintiffs' complaint,

Mario Belaval's principal employer is Triple S, the largest managed

care company in Puerto Rico, where Belaval is Vice Chairman.

Belaval is also a director of twenty-three UBS-affiliated funds,

including the four Funds at issue in this case.                In the recent

past, Triple S has enjoyed a lucrative relationship with UBS

Financial and UBS Trust. In fact, in 2006, with the help of UBS

Trust and UBS Financial, Triple S engaged in a transaction similar

to the ERS bonds offering at issue in this case. In the 2006

transaction, UBS Financial served as the placement agent for a $35

million bond offering from Triple S. UBS Trust purchased this

entire offering, and then re-sold the notes to several of the funds

it advises, including Fund IV. In other words, Belaval is an

officer of a company that benefitted significantly from the same

affiliation that is at the heart of this case, using UBS Financial

to sell Puerto Rican securities to UBS Trust for resale to its

exempt funds.       Plaintiffs allege that Triple S's previous use of

the relationship between UBS Financial and UBS Trust gives Belaval

"reason    to     discourage   scrutiny   of   any   similar   related-party

transactions, such as the purchase of the ERS Bonds."

            In addition to Belaval's prior reliance on UBS Trust and

UBS Financial to raise capital, plaintiffs allege that by remaining

in   the   good    graces of   UBS   affiliates,     Belaval   would receive


                                     -24-
benefits including "opportunities to use UBS captive funds to

support [his] other business ventures." These opportunities are

particularly valuable to businesses in Puerto Rico because UBS

Trust is "the largest asset manager" in Puerto Rico, and UBS Trust

and its "alter ego" UBS Financial "are an unusually pervasive force

in Puerto Rico's financial markets."

           In    deciding          that    plaintiffs    had       not    established    a

reasonable doubt about Belaval's independence, the district court

failed to consider the facts alleged as a whole about Belaval's

relationships with the institutional defendants.                         See In re Trump

Hotels, 2000 WL 1371317, at *9 (noting that while one allegation

standing alone "is insufficient to raise a reasonable doubt[,] . .

. the totality of the circumstances raises a reasonable doubt" as

to the director's independence). The district court should have

considered Belaval's previous professional relationships with both

institutional defendants and the possibility that Belaval will need

the   assistance          of   the   UBS    defendants       in    the    future   as    a

constellation        of    facts     which,      considered       together,    create    a

reasonable doubt about Belaval's independence. See, e.g., id. at *8

("Courts have considered the possibility of future influence or

remuneration as a factor when weighing director independence.");

Krantz,   98    F.    Supp.     2d   at    156    (listing     factors      relevant    to

determining whether a director is controlled including "former




                                           -25-
business associations between the director and the controlling

person").

               Similarly,       the       district   court     incorrectly   dismissed

plaintiffs' characterization of Belaval's entanglements with the

institutional defendants as "conclusory allegations," and failed to

make reasonable, common sense inferences from the facts alleged in

the complaint. See In re Oracle Corp., 824 A.2d at 943 (reasoning

that in assessing a director's independence the chancellor must

"necessarily      draw     on    a    general    sense    of    human   nature"). The

complaint depicts the institutional defendants as powerful actors

in    Puerto    Rico's   capital markets             who play     multiple   roles in

Belaval's life: employer, underwriter, investor, and gate-keeper to

Puerto Rico's capital markets. For Belaval, deciding to bring

plaintiffs' lawsuit would mean not only suing two institutions that

are important to Triple S, but also accusing four of his co-

directors – who are themselves prominent players in Puerto Rico's

business       community    –        of    violating     federal    securities   law.

Considering all of these allegations together, we conclude that

plaintiffs have established a reasonable doubt that a person in

Belaval's position could evaluate demand in this case without

"ponder[ing] the effect affirmative action on a demand would have

on [his] future." In re The Student Loan Corp., 2002 WL 75479, at

*3.




                                             -26-
6. Vincente Leon

            Finally, we examine the facts alleged concerning director

Vincente Leon, which are nearly identical to those regarding

Belaval. Leon is both a director of each of the Funds and a vice-

chairman of Triple S. He sits on the boards of many UBS Trust

affiliated funds. Under these circumstances, Triple S's past use of

the UBS affiliates' financial network in a transaction similar to

the ERS bonds transaction, UBS Trust's significant past purchases

and current holdings of Triple S notes, the power of the UBS

defendants in Puerto Rico's financial markets and the likelihood

that   in   the    future   Leon   will      need   assistance   from   the    UBS

defendants in accessing the Puerto Rican markets, lead us to

conclude that plaintiffs have plead sufficient facts to create a

reasonable doubt that Leon could objectively consider the demand.

                                        V.

            In summary, the plaintiffs' allegations have established

with sufficient particularity a reasonable doubt about the ability

of the six directors identified above to evaluate plaintiffs'

demand to bring this action on behalf of the Funds with the

disinterest       and   independence   required      under   Puerto   Rico    law.

Because the boards of directors of the Funds have eleven members,

plaintiffs have established under Rales that a presuit demand would

have been futile.        The district court erred in reaching a contrary

conclusion.       Plaintiffs' derivative claims should not have been


                                       -27-
dismissed.   We therefore vacate the dismissal of those claims and

remand for further proceedings consistent with this opinion.8

Costs are awarded to the appellants.

          So ordered.




     8
       In light of this decision, there was no need for plaintiffs
to file an amended complaint. However, if plaintiffs wish to file
an amended complaint for reasons unrelated to the sufficiency of
their demand futility pleadings, they will have an opportunity to
request permission to do so upon remand.

                               -28-
