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NY Courts Disagree On California Demand Requirement

Unlike the federal courts and Delaware's Court of Chancery, California has a statutory demand requirement.  Section 800(b)(2) of the Corporations Code provides:

"The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file."

Note that the highlighted language appears to impose a separate allegation requirement because it requires the complaint "allege further".  The Appellate Division of the New York Supreme Court applied the same language in former Corporations Code Section 15702(a)(2) (governing derivative suits by domestic or foreign limited partnerships) to dismiss a plaintiffs' suit:

Although the complaint alleges why the plaintiffs believe that a demand upon the general partner would be futile, it does not state that the limited partnership or the general partner were informed in writing concerning the ultimate facts of each action or that a true copy of the complaint was delivered to either the limited partnership or the general partner, as California law requires (see, Cal Corp Code § 15702 [a] [2]).  Therefore, the plaintiffs' first cause of action must be dismissed as against the appellants.

Re v. Weksel, 130 A.D.2d 640, 641-42 (1987) (emphasis added).

In a more recent case, the defendant argued that the court had "overlooked" the second half of Section 800(b)(2). Raycom Program Ventures, Inc. v. Reliable Fast Cash, LLC, 2018 N.Y. Misc. LEXIS 5518.  Judge Leon Ruchelsman allowed that the statute "appears to require an additional notice to the board or a copy of the complaint" but ruled that the absence of such notification cannot be deemed a failure to comply with the statute.  

I am a puzzled by at least two aspects of the ruling.  First, why were the parties arguing about Section 800(b)(2) in the first place when the entity involved appears to be a limited liability company, not a corporation.  Second, there is no mention of the earlier and opposite holding in Re v. Weksel.

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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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