Barr v. Wackman

New York Court of Appeals · Corporations

CorporationsShareholder derivative actionsDemand futilityDirectors' fiduciary dutiesderivative suitdemand requirementdemand futilityBusiness Corporation Law § 626(c)

Facts

Plaintiff, a Talcott shareholder, sued Gulf & Western, its subsidiary First Capital, and 16 Talcott directors, alleging that affiliated directors dominated Talcott and, together with Gulf & Western, arranged transactions less favorable to Talcott than an earlier merger proposal. The complaint alleged that Talcott's board approved a lower tender offer, authorized favorable employment arrangements, approved or was connected to a finder’s fee benefiting the board chairman's son, and caused the sale of a subsidiary in transactions allegedly producing a large net loss to Talcott. The affiliated directors allegedly benefited personally, while the unaffiliated directors allegedly participated in, authorized, or approved the transactions and failed to exercise independent judgment, due care, and diligence. Plaintiff did not make a demand on the board, alleging that a majority of directors had participated in the challenged acts and could not be expected to vote to sue themselves.

Issue

Whether a shareholder derivative complaint sufficiently excuses pre-suit demand under Business Corporation Law § 626(c) when it alleges with particularity that a majority of directors participated in and approved challenged transactions, and that unaffiliated directors may be liable for breach of duties of due care and diligence even though they are not alleged to have personally engaged in self-dealing.

Rule

Under Business Corporation Law § 626(c), a derivative complaint must plead with particularity either the plaintiff's efforts to secure board action or the reasons for not making that effort. Demand is excused when, from the particular circumstances alleged, it may be inferred that demand would be futile, including where the alleged wrongdoers control or comprise a majority of the board or where the claim of liability is based on formal board action in which directors participated. It is not enough merely to name directors as defendants with conclusory allegations, but particular allegations of formal board participation in and approval of active wrongdoing may suffice even if a majority of directors are not individually charged with fraud or self-dealing.

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Nina Patel owns shares of Lakefront Components, Inc., a New York corporation based in Buffalo. She files a derivative suit in Albany without making a pre-suit demand, alleging that six of nine directors are named as defendants and "breached fiduciary duties" by approving a supply agreement, but her complaint gives no details about the board meetings, the agreement's terms, or why the approval was wrongful.

Under the governing rule, is demand most likely excused?

Explanation. Demand must be pleaded with particularity, either by describing demand efforts or reasons for not making them. A complaint does not satisfy that requirement by merely naming directors as defendants and asserting wrongdoing in conclusory terms. The majority opinion distinguished such bare pleading from particular allegations of formal board participation in wrongful transactions. (Derived from Barr v. Wackman (n.d.).)