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For Want of a Written Demand to an Entity’s Board of Directors, a Shareholder’s Derivative Action in Georgia Goes by the Wayside

Poole Huffman, LLC

It’s important to recognize that derivative actions have certain specific procedural requirements and that, regardless of the strength of the evidence a shareholder has, the suit will fail if they do not follow these procedural steps. As a shareholder, it is imperative to recognize the grave risk to your case; namely, a dismissal of your claims. As a corporation or its directors, it’s important to recognize how these rules and requirements can work to your distinct advantage, offering you the chance to defeat a claim before it even gets to trial. Whether you’re a shareholder, a director, or a business entity, an experienced Atlanta derivative action lawyer can help you ensure that you are using both the substantive law and procedural rules to your maximum benefit.

A recent derivative action from here in Georgia demonstrates exactly how a procedural shortcoming can scuttle a case.

The corporation at the center of this derivative action was an Atlanta-based entity that provided fuel cards to businesses. The shareholder, J.W., was an Illinois man who alleged that the corporation “engaged in a scheme to artificially inflate its stock price between February 2016 and May 2017.” The corporation also engaged in deceptive marketing of its fuel cards as “fee-free,” despite the cards having a variety of fees like program fees, account fees, and late fees, according to the complaint.

Although the case proceeded in federal court in Georgia and the corporation was headquartered in Atlanta, the entity was a Delaware corporation. That meant that, in a derivative suit, a shareholder must comply with Delaware law. Delaware law imposes on the shareholder the obligation to serve a demand upon the corporation’s board of directors before advancing to court, and the only way a shareholder can escape this requirement is if they prove that fulfilling the demand obligation is excused by law. (The only way demand is excused is if providing the demand to the board would be futile.)

In J.W.’s case, he asserted futility on two bases: one, that a press release the corporation issued in the wake of a Federal Trade Commission complaint showed that the board had “prejudged the claims” J.W. advanced and, two, that a majority of the board members faced a “substantial likelihood of liability” on the shareholder’s claims.

Those assertions were not enough to escape dismissal. As noted above, the shareholder had to comply with Delaware substantive law. However, as also noted above, the shareholder advanced his case in federal court, meaning that he also was under an obligation to satisfy the Federal Rules of Civil Procedure. The federal that governs derivative actions — Rule 23.1 — says that a shareholder must plead with particularity the reasons why making a demand would have been futile. In essence, the particularity requirement means that the party must plead his assertions with specificity as opposed to pleading generally.

The crux of the shareholder’s case required proving that a majority of the corporation’s board members had knowledge of the fraudulent scheme he alleged. The shareholder’s pleadings failed to assert with proper specificity that a majority of the board members — either individually or collectively — had knowledge of the alleged scheme. That meant that he had failed to show that making a demand was futile, which meant that he failed to show that the failure was excused, and the board members were entitled to a dismissal.

Whether you’re a shareholder seeking to advance a derivative action or a businessperson needing to defeat such a lawsuit, you need knowledgeable counsel on your side to ensure the procedural technicalities specific to derivative actions do not prevent you (as a shareholder) from pursuing your case or are (as a businessperson or entity) used to the fullest to protect you from needless litigation. Whichever side you’re on, the experienced Atlanta derivative action attorneys at Poole Huffman, LLC are here to help with advice that is both clear and experience-driven, along with advocacy that is effective and detail-oriented. Contact our attorneys online or by calling 404-373-4008 to schedule your confidential consultation today.

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