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Criteria for Shareholder’s Derivative Action and Shareholder’s Action to Inspect Corporate Books Explained

The Second Department explained the pleading criteria for a shareholder’s derivative action for inspection of corporation records.  Here the court determined the shareholders failed to first demand that the corporation initiate an action before bringing the derivative action, and the shareholders’ speculative and conclusory allegations were not sufficient to demonstrate a “proper purpose” for the inspection of corporate records:

A plaintiff in a shareholders’ derivative action must demand that the corporation initiate an action before commencing an action on the corporation’s behalf, and the complaint must “set forth with particularity” his or her efforts “to secure the initiation of such action by the board or the reasons for not making such effort” … . Demand may be excused because of futility where the complaint alleges with particularity, inter alia, that a majority of the board of directors is interested in the challenged transaction[s] … . However, “[i]t is not sufficient . . . merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by wrongdoers to justify failure to make a demand” … . Here, the plaintiffs’ submissions failed to allege specific facts supporting their contention that the defendant directors were interested, such that demand was not required, and the Supreme Court … properly granted that branch of the defendants’ motion which was to dismiss [the relevant] causes of action on that ground… . * * *

…”[A] shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose” (…Business Corporation Law § 624[f]). However, the plaintiffs failed to allege that their demand for an inspection of [the] books and records met the requirements for such relief under the Business Corporation Law (see Business Corporation Law § 624[b]). The plaintiffs also failed to state a cause of action for an inspection of [the] corporate books and records at common law, since a plaintiff asserting his or her common-law right must plead a “proper purpose” for the inspection …. Apart from the claim concerning the nonpayment of profit distributions …, the plaintiffs’ asserted purposes for the inspection were speculative, vague, and conclusory. As such, they were insufficient to establish a proper purpose for the inspection… . JAS Family Trust v Oceana Holding Corp, 2013 NY Slip Op 05734, 2nd Dept 8-28-13

 

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