October 29, 2020

Volume X, Number 303

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If You Plan To Claim Demand Futility, You Had Best Not Make A Demand

Rule 23.1 of the Nevada Rules of Civil Procedure specifies the pleading and standing requirements for shareholder derivative actions.  Among other things, Rule 23.1 requires that a complaint "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff’s failure to obtain the action or for not making the effort".  In other words, a plaintiff must either allege that she made a demand on the corporation's board of directors or that the making of such a demand would be futile. 

In Meridian OHC Partners, LP v. Davis, 2020 U.S. Dist. LEXIS 43285, the plaintiff had filed a derivative action alleging breaches of fiduciary duty, abuse of control, gross mismanagement, and waste of corporate assets.  The complaint alleged that demand was futile.  There was a problem, however, because the plaintiff had previously filed a derivative action in Nevada state court alleging that it had made a demand and that the demand had been wrongfully refused.  After the Nevada state court judge dismissed the action, the plaintiff filed another derivative action in federal district court.  Judge Jill A. Otake ruled:

"Indeed, it is contradictory for Plaintiff to argue in this action that demand would be futile when it already presented a demand and asserted allegations about the demand in the Nevada action."

When a shareholder makes a demand on the board, it is conceding that disinterestedness of the board to consider the demand.  That concession, however, does not foreclose the shareholder from challenging a board's decision not to pursue the action demanded by the shareholder, but that would be a case of wrongful refusal and not demand futility.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 206
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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