January 19, 2022

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January 19, 2022

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January 18, 2022

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The Proper Purpose Of Discovery In California Derivative Suits

A plaintiff holding less than 2000 shares files a derivative suit against a corporation’s current or former directors and officers.  The trial court finds the complaint to be internally inconsistent and that regulatory filings disproved allegations of false or misleading statements.  More importantly, the trial court finds that the complaint fails to allege particularized facts showing that a pre-suit demand on the board of directors would have been futile.  The plaintiff argues that he is entitled to propound discovery on the corporation’s directors and officers “to help him fashion a sufficient complaint”.  When the trial court rejects this argument, the plaintiff appeals.

In a brief opinion issued earlier this month the California Court of Appeal soundly rejected the plaintiff’s argument, finding:

The proper purpose of discovery in a shareholder derivative action is to find out additional facts about a well-pleaded claim, not to find out whether such a claim exists.

Jones v. Martinez, Cal. Ct. Appeal Case No. B249146 (filed 10/2/2014 certified for publication 10/27/2014).  The case involved a Delaware corporation, so the Court of Appeal applied Delaware, not California law.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 301
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About this Author

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

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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