Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 13, 2013

New York Shareholder Derivative Plaintiffs Must Plead With Particularity Why Board’s Failure to Comply With Pre-Suit Demand Was Improper

On November 8, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Kenney v. Immelt, 2013 NY Slip Op. 51831(U), dismissing with leave to replead a shareholder derivative claim filed by shareholders of General Electric Company against GE’s officers and directors alleging that they breached their fiduciary duties by, among other things, cutting the quarterly dividend paid to GE’s shareholders from 31 cents/share to ten cents/share.

Section 626(c) of New York’s Business Corporation Law (“BCL”) provides that a complaint in a shareholder derivative action “shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.” (Emphasis added). In contrast, Delaware Chancery Court Rule 23.1 (which is substantially similar to FRCP 23.1) provides that a derivative complaint “shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.”

Here, the plaintiffs did not allege that it would have been futile to demand that GE’s Board sue its officers and directors but instead alleged that they made such a demand and that it was wrongfully refused by GE’s Board. The issue before Justice Bransten was, therefore, whether plaintiffs were required to plead with particularity not only how they made their demand on the Board but also why the Board wrongfully rejected their demand. As Justice Bransten noted, “while the language of [Del. Ch. R. 23.1] is similar to that of BCL 626(c), the New York rule notably omits an explicit requirement that the complaint allege with particularity the reasons why the sought after action was not obtained.” After exhaustively canvassing relevant New York and Delaware case law, Justice Bransten concluded that “the particularized pleading requirement of BCL 626(c) should include not only allegations that demands were made on the [Board] . . . to initiate legal action, but also who made the demands, when they were made, which Board members they were made to, the content of the demands [and] why the Board refused to take action.” (Internal quotation marks omitted)(emphasis added). Justice Bransten also observed that these heightened pleading requirements were consistent with the heightened pleading requirements imposed by the New York Court of Appeals for pleading demand futility. Applying this heightened standard, Justice Bransten then concluded that plaintiffs had not pled with sufficient particularity that GE’s Board had wrongfully refused plaintiffs’ pre-suit demand.

Finally, Justice Bransten rejected plaintiffs’ request (made in their opposition to defendants’ motion to dismiss and not in a separate motion or cross-motion) for limited discovery into the facts relating to the investigation and refusal of their pre-suit demands before the Court addressed whether the Board’s refusal of plaintiffs’ demands were wrongful, although she did grant plaintiffs leave to replead their complaint with the particularity that she found was lacking, even though plaintiffs had not requested leave to do so in opposing defendants’ motion to dismiss.

Justice Bransten’s opinion is a must-read for practitioners interested in the similarities and differences between New York and Delaware law with respect to the specificity with which a shareholder derivative plaintiff must plead the pre-suit steps the plaintiff took to demand that the corporation’s Board cause the corporation to bring the lawsuit demanded by the plaintiffs.

View posts