Shareholder Derivative Lawsuits and the Pre-Filing Requirements of Corporations Code §800(b)(2)

Shareholder Derivative Lawsuits and the Pre-Filing Requirements of Corporations Code §800(b)(2)

It is a fundamental principle of corporate governance that the role of managing the business of the corporation, including the prosecution, defense, and control of corporate litigation, is vested in its board of directors, not in its shareholders. (Cal. Corp. C. §300). When the board refuses to enforce a corporate claim, however, a shareholder may file a derivative action. In deference to the managerial role of the board, and to curb potential abuse, the shareholder must first show that he or she made a pre-litigation demand on the board to take the desired action, but the board refused to take any such action. This deference was recognized by our Supreme Court over 120 years ago in Hawes v. City of Oakland (1881) 104 U.S. 450, 26 L.Ed. 827, which was codified in California’s Corporations Code §800(b)(2).

Pursuant to Section 800(b)(2), a plaintiff shareholder must allege with particularity (1) the demand it made on the board for action, or, alternatively, why such demand would have been futile; and (2) allege further that it informed the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or board a true copy of the complaint “which plaintiff proposes to file.” (Corp. C. §800(b)(2)).

A plaintiff shareholder filing a derivative action seeking redress on behalf of a corporation “must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be apparent to the court.” (Bader v. Anderson (2009) 179 Cal.App.4^th 775, 789). When alleging “demand futility”, Section 800(b)(2) requires a shareholder to make allegations “with particularity”, meaning that “general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice.” (Id. at 790). Instead, the shareholder must apprise the court “of facts specific to each director from which [the court] can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.” (Id.)

A plaintiff shareholder who does not follow the pre-litigation provisions of Corporations Code §800(b)(2) has no standing to bring the action on behalf of the corporation. (Bader, 179 Cal.App.4^th at 793; Nelson v. Anderson (1999) 72 Cal.App.4^th 111, 127).

Marie E. Wood, Esq., is an associate attorney with Reid & Hellyer, APC, where she practices immigration law as well as business and real estate litigation. She is an advisor to the California Lawyers Association, Real Property Law Section Executive Committee, a founding and board member of the Hispanic Bar Association of the Inland Empire, a board member of the Southwest Riverside County Bar Association, and a member of the American Immigration Lawyers Association, Southwest Inn of Court, Riverside County Bar Association, and North County Bar Association.