Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...
By Michael Greene
Nov. 5 — Stockholders bringing derivative claims against Delaware corporations cannot circumvent Delaware's demand futility rules by bringing their claims in another state with broader discovery rules, according to an October California Court of Appeals ruling.
According to Paul Hastings LLP, this marks the first time a California appellate court has decided whether plaintiffs filing derivative actions in California against Delaware corporations are entitled to discovery prior to establishing demand futility.
Here, the plaintiff filed a derivative action against Deckers Outdoor Corp. and shortly thereafter served a discovery request on the company.
Subsequently, a California trial court denied the discovery request because under Delaware law, plaintiffs in derivative lawsuits are not entitled to discovery until they establish a right to bring their cause of action. Accordingly, the trial court granted leave to amend the complaint so the plaintiff could plead particularized facts showing demand futility.
The plaintiff appealed, arguing that California's broader discovery rules should apply because the issue is “purely procedural.”
The California Court of Appeals, however, rejected this argument. The court found that the issue of whether discovery can occur before demand futility is established is a matter of “substance” and not “procedure.”
“The proper purpose of discovery in a shareholder derivative action is to find out additional facts about a well-pleaded claim, not to find out whether such a claim exists,” the court opined.
Accordingly, the court held that the plaintiff must comply with the “particularized pleading requirements” of Delaware law without the assistance of discovery.
To contact the reporter on this story: Michael Greene in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Ryan Tuck at email@example.com
The opinion is available at http://www.bloomberglaw.com/public/document/JONES_v_MARTINEZ_2d_Civil_No_B249146_2014_BL_276079_Cal_App_2d_Di.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)