A Recent Reminder That Omitting This Averment May Doom A Derivative Claim

Section 800 of the California Corporations Code applies to actions brought in the name of any domestic or foreign corporation, aka derivative actions.  It is similar, but not the same as, Delaware Court of Chancery Rule 23.1 and Federal Rule of Civil Procedure Rule 23.1. 

A key, yet subtle, difference can be found in Section 800(b)(2) which requires that a plaintiff allege with particularity its efforts to secure action from the board of directors or the reasons why it did not make the effort.  For those familiar with Delaware Court of Chancery Rule 23.1 or Federal Rule of Civil Procedure Rule 23.1, this is known as the requirement to plead either that a demand was made or demand futility.  California adds something more, however.  I've copied Section 800(b)(2) and highlighted the additional California requirement below:

The plaintiff alleges in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.

In Re v. Weksel, 130 A.D.2d 640 (1987), the Appellate Division of the New York Supreme Court applied the same language in former Section 15702(a)(2) (governing derivative suits by domestic or foreign limited partnerships) to dismiss a plaintiffs' suit:

Although the complaint alleges why the plaintiffs believe that a demand upon the general partner would be futile, it does not state that the limited partnership or the general partner were informed in writing concerning the ultimate facts of each action or that a true copy of the complaint was delivered to either the limited partnership or the general partner, as California law requires (see, Cal Corp Code § 15702 [a] [2]).  Therefore, the plaintiffs' first cause of action must be dismissed as against the appellants.

Id. at 641-42 (emphasis added).

Last week, U.S. District Judge Gonzalo P. Curiel found that even if the plaintiff had properly alleged demand futility, the plaintiff had failed to allege that he met the second requirement under Section 800(b)(2) to provide the corporation, in writing, the ultimate facts of each cause of action alleged in the complaint or provide the corporation's board a proposed copy of the complaint that the plaintiff intended to file.  Stanz v.  Brown, 2023 WL 3907784 (S.D. Cal. June 8, 2023). 

"Miss Dunne clicked on the keyboard:
—16 June 1904.
Five tallwhitehatted sandwichmen [sic] between Monypeny’s corner and the slab where Wolfe Tone’s statue was not,
eeled themselves turning H. E. L. Y.’S and plodded back as they had come."