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Failure To Follow Up Demand Dooms Derivative Suit

Shareholders wanting to pursue a derivative suit all come to the same fork in the road.  One fork is to make a demand.  The other is to file a lawsuit and allege that demand would have been futile.  Most plaintiffs choose the latter because the act of making the demand terminates their ability to pursue a suit on behalf of the corporation, unless they can plead that the demand was wrongfully refused.

A recent ruling by Judge Michael A. Shipp tackled the requirements for sustaining a demand refused suit under Nevada law.  Bravetti v. Liu, 2015 U.S. Dist. LEXIS 56124 (D. N.J., April 29, 2015).  The plaintiff alleged that he had made demand on the board of directors of American Oriental Bioengineering, Inc., a Nevada corporation that allegedly had issued false and improper statements regarding its accounting controls and financial status.  The plaintiff waited 60 days, but hearing nothing filed suit, claiming that the delayed response was so unreasonable that it constituted wrongful refusal.

Judge Shipp, noting that the Nevada Supreme Court had not defined the substantive requirements for pleading demand refusal, looked to Delaware law.  According to Judge Shipp, the purpose of the demand is “to assure that the stockholder affords the corporation the opportunity to redress the alleged wrong without litigation, to decide whether to invest the resources of the corporation in litigation, and to control any litigation which does occur.”  quoting Spiegel v. Buntrock, 571 A.2d 767, 773 (Del. 1990).  The defendants claimed that they had never received the letter from the corporation’s registered agent.  Faulting the plaintiff’s failure to follow-up, Judge Shipp found the plaintiff’s complaint to be premature.

Happy Birthday California!

As mentioned in yesterday’s post, California was admitted to the union 165 years ago today.  That same year, Los Angeles was incorporated as a city (April 4).  When admitted as a state, California had less than 100,000 people.  Today, nearly 39 million people live here.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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