On July 5, 2018, the First Department issued a decision in Epstein v. Ruane, Cunniff & Goldfarb Inc., 2018 NY Slip Op. 04970, affirming the dismissal of a derivative action for failure adequately to plead demand futility, explaining:
Plaintiff failed to allege sufficient facts to establish that a pre-suit demand on the board of the nominal defendant (Sequoia) to prosecute the action would have been futile under applicable Maryland law. The allegations of the complaint do not clearly demonstrate, in a very particular manner, that a majority of the directors are so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule.
When this action was commenced, Sequoia’s board had five members. Defendants do not seriously dispute that defendants Robert D. Goldfarb and David Poppe (the Inside Directors) were conflicted. However, plaintiff failed to demonstrate that any of the Outside Directors (defendants Robert L. Swiggett, Roger Lowenstein, and Edward Lazarus), who are presumed to be disinterested, was also conflicted.
The complaint alleges no specific facts about Lazarus to rebut the presumption. It alleges that Lowenstein and Swiggett were conflicted due to their longstanding history as Sequoia board members and relationships with Goldfarb, Poppe, and defendant Ruane, Cunniff & Goldfarb Inc. (the Adviser). However, evidence of personal and/or business relationships is not sufficient to excuse a demand. Nor is it sufficient that Swiggett and Lowenstein were compensated for their services as board members.
The fact that Lowenstein and Swiggett approved or participated in some way in the challenged transaction or decision, and thus may be subject to liability therefor, is also insufficient to demonstrate demand futility.
Poppe’s purported admission in a New York Times article that he and Goldfarb made all investment decisions does not prove that the Outside Directors were under their domination or control, since they may have acquiesced in these decisions for legitimate business reasons. Moreover, Poppe also admitted that, although he and Goldfarb made the final decisions, they nonetheless listened to their [the Outside Directors’] input. This is consistent with Poppe’s and Goldfarb’s roles as portfolio managers and representatives of the Adviser, and typical of the role of an investment adviser to a mutual fund.
It is immaterial to the issue of demand futility that two former directors resigned in connection with the decisions at issue here.
(Internal quotations and citations omitted).
This decision illustrates one of the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.
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