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Posted: January 27, 2017

Derivative Action Dismissed; Demand Insufficient and Futility Not Shown (New York Count

On January 17, 2017, Justice Singh of the New York County Commercial Division issued a decision in Sims v. Firstservice Corp., 2017 NY Slip Op. 30104(U), dismissing a derivative action for lack sufficient allegations of demand, explaining:

The demand requirement rests on the basic principle of corporate governance that the decisions of a corporation – including the decision to initiate litigation – should be made by the board of directors or the majority of shareholders. Accordingly, the demand requirement is a prophylactic device designed to weed out unnecessary or illegitimate shareholder derivative suits commenced by shareholders for personal gain rather than the benefit of the corporation.

The complaint in the instant matter does not state that plaintiff ever made a pre-suit demand on the board of directors. Plaintiffs communications with the board and the board’s response are set forth at paragraphs 60, 61, 68 and 69 of the.complaint. The complaint alleges that plaintiff posed various questions to the board of directors regarding the garage transaction; requested an opportunity to review documents pertinent to the transaction and bid procedures; and asked the board to meet and discuss facts regarding the transaction. On June 4, 2015, the board consented to plaintiffs review of the garage lease at defendants’ office on June 8, 2015. Plaintiff contends that Virginia Manning refused to meet with him when he showed up ather office. The complaint asserts that during June 2015 the board members never responded in substance to questions plaintiff posed; did not allow any independent review of any relevant documents, despite plaintiffs standing requests for them; and said that the issue of disclosure, access and review would be raised at the July board meeting.

Plaintiff maintains that the board’s delay in responding to the requests for information was deliberate stonewalling until after July 1, 2015, at which time Icon Parking would begin its operations at the garage pursuant to the new lease. The Court finds that the complaint on its face fails to plead a proper demand. BCL 626( c) does not provide any specific instruction for making demand. Accordingly, New York courts have held that the demand to sue need not assume any particular form nor need it be made in any special language. Nevertheless, the demand must be made in earnest, not a simulated effort which must be made apparent to the court.

Here, the complaint does not state that an oral demand was ever made to the board. Nor does that complaint plead that a written demand was made to the board identifying the alleged wrongdoers; describing the factual basis of the alleged wrong and the harm caused to the corporation; requesting that the directors bring suit; providing the directors with sufficient time to consider and act upon the demand; and indicating that litigation would result from an improper refusal to sue.

(Internal quotations and citations omitted).

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