Earlier this week, Kevin M. LaCroix wrote about a lawsuit filed recently against The We Companies, commonly referred to as WeWork. The company attracted a lot of press attention when in September it withdrew the registration statement for its initial public offering . The plaintiff alleges that she is a shareholder and filed the complaint as both a class action and a derivative suit. She is suing for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, unjust enrichment, abuse of control, and declaratory and injunctive relief.
WeWork is a Delaware corporation, but the lawsuit was filed in the California Superior Court. California Corporations Code Section 800 provides that no action may be instituted or maintained in the right of a domestic or foreign corporation unless specified conditions are met. One of these conditions is:
"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."
Superficially, this appears to be a standard "demand futility" pleading requirement. The California statute, however, adds an additional requirement that must be met before a derivative action is filed. 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:
Id. at 641-42 (emphasis added). See also Novak v. Polaris Holding Co., 225 A.D.2d 378, 379 (1996) ("Since the complaint 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, the complaint must be dismissed pursuant to California law." (citing Re v. Weksel)). In a more recent case, the defendant argued that the court had "overlooked" the second half of Section 800(b)(2). Raycom Program Ventures, Inc. v. Reliable Fast Cash, LLC, 2018 N.Y. Misc. LEXIS 5518. Judge Leon Ruchelsman allowed that the statute "appears to require an additional notice to the board or a copy of the complaint" but ruled that the absence of such notification cannot be deemed a failure to comply with the statute. The court makes no reference to Re v. Weksel.
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] ). Therefore, the plaintiffs' first cause of action must be dismissed as against the appellants.