Mere Theory as to the Board's Misconduct Insufficient to Plead Demand Futility With Particularity

On November 15, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Shields v. Murstein, 2018 NY Slip Op. 32964(U), holding that a "mere theory as to the Board's misconduct is insufficient to meet" the demand particularity requirements for a derivative action under Delaware law, explaining:

In a final attempt to salvage his claims, Shields argues that demand was futile because the Board acted in bad faith in failing to timely and meaningfully address unlawful activity related to the Publications. Bad faith, and therefore demand futility, may be established where the complaint successfully alleges that directors failed to take adequate steps to remediate known compliance issues. But this is not the case here.

The Complaint fails to support its claims with requisite specificity. Shields makes sweeping statements that the Director Defendants engaged in a conspiracy without specifying who did what, never mind when, where or how. Shields' basis for his allegations is again the Board's lack of minutes, resolutions or presentations relating to Frigo in response to his Inspection Demand. A mere theory as to the Board's misconduct is insufficient to meet the particularity requirements of Rule 23.1.

(Internal citations omitted).

This decision illustrates one of the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.