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Posted: October 11, 2016

Demand Futility Allegations in Amended Complaint Judged Based on Facts at Time of Amendment

On October 4, 2016, the First Department issued a decision in Korsinsky v. Winkelreid, 2016 NY Slip Op. 06454, holding that demand futility allegations in an amended complaint are based on the facts at the time of amendment, explaining:

In this purported derivative action challenging the valuation of the nominal defendant’s compensatory stock options, the motion court properly dismissed the second amended complaint for failure to allege particularized facts evincing the futility of a demand on the nominal defendant’s board of directors. The demand futility requirement needed to be measured in terms of the 2013 board in existence at the time of the second amended complaint, rather than the 2009 board in existence when the original complaint was filed. The second amended pleading does not relate back to 2009 for demand futility purposes, because the original pleading was not “validly in litigation” — that is, it would not have survived a motion to dismiss, given the original plaintiff’s sale of his shares in the nominal defendant in July 2009 and his resulting inability to satisfy the continuous share ownership requirement governing derivative actions.

Assessing demand futility in terms of the 2013 board, the motion court correctly determined that plaintiff had failed to allege particularized facts demonstrating that the board’s directors were interested and/or lacked independence. In particular, plaintiff failed to allege in nonconclusory fashion that the amounts of the options received by certain director defendants were material in the context of their economic circumstances.

Nor were the allegations regarding the board’s approval of the challenged options sufficient to raise doubts as to whether the approval was a valid exercise of business judgment. In view of the exculpatory clause in the nominal defendant’s certificate of incorporation, no director faced a substantial likelihood of liability for approving the options. Unlike the fraudulent backdating of options at issue in Ryan v Gifford (918 A2d 341, 355-356 [Del Ch 2007]), the awarding of options in amounts based on the board’s discretionary valuations was a valid exercise of business judgment untainted by bad faith.

(Internal quotations and citations omitted) (emphasis added).

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