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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 1, 2016

Pre-Suit Demand Without Opportunity to Investigate Insufficient in Derivative Action

On May 31, 2016, the First Department issued a decision in Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC, 2016 NY Slip Op. 04129, holding that a pre-suit demand was insufficient in a derivative action, explaining:

Contrary to the decision of the lower court and the decision in Kenney v Immelt (41 Misc 3d 1225[A] [Sup Ct, NY County 2013]), under BCL § 626(c), there is no pleading standard requiring that a shareholder bringing a derivative action who alleges the efforts he or she made, in making a pre-suit demand on the board to take action, also allege that the board wrongfully rejected the demand, and this Court’s decision in Tomczak v Trepel (283 AD2d 229 [1st Dept 2001], lv denied, dismissed 96 NY2d 930 [2001]) should not be read to support such conclusion. However, plaintiffs here, who made pre-suit demands but then filed the complaint without giving the board a reasonable opportunity to investigate and respond to the demands, did not satisfy the demand requirement and cannot satisfy the BCL § 626(c) pleading standards based on their allegations of their efforts to obtain board action.

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

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