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Bohigan v Pearson, Sup Ct, New York County, October 15, 2010, Schweitzer, J., Index No. 650149/10

Posted in Breach of Fiduciary Duty, CPLR 3211, Demand Futility Doctrine, Derivative Actions, Industry: financial services, Justice Schweitzer, Melvin L., Motion to Dismiss, New York, Unjust Enrichment

In an October 15, 2010, decision by Justice Schweitzer in connection with a shareholder derivative action brought by plaintiff-shareholder on behalf of an asset-management company against its board of directors alleging an improper accounting of the company’s investments, and on defendants’ motion to dismiss for failure to state a cause of action and failure to make a pre-suit demand on the board under Delaware law, the court granted defendants’ motion, finding that plaintiff was not excused from making such a demand under the demand-futility doctrine because 1) the sole authority of each of the directors to determine the company’s value was not “unique” and plaintiff failed to plead with the requisite particularity facts to suggest that the board was alerted to potential misconduct; 2) the board’s knowledge of the market meltdown of 2008 was not a violation of the its code of ethics and was not suggestive of its awareness of any company wrongdoing; 3) the board members’ service on the company’s audit, valuation, and compensation committees alone was insufficient to excuse a pre-suit demand and plaintiff’s allegations regarding specific breaches on the part of committee members was “entirely conclusory”; and 4) plaintiff failed to show how the board members’ past and current professional relationships impeded their ability to assess objectively a pre-suit demand. In sum, the court found that “the complaint fails to plead particularized facts that show where the board ostensibly crossed the line making their failure to prevent the false valuations to be bad enough to create a reasonable doubt that the board cannot properly exercise its independent and disinterested business judgment in responding to a demand.” The court granted plaintiff leave to amend the complaint within 45 days of its order.