Plaintiffs Not Entitled to Attorneys Fees in Shareholder Derivative Action Because They Did Not Go to the Board Before Going to Court

In a full-fledged opinion by Justice Friedman, the First Department determined the plaintiffs in a (putative) shareholder derivative action were not entitled to an award of legal fees pursuant to Business Corporation Law 626 because the plaintiffs went straight to court without first making a pre-suit demand upon the board for the desired action.  The plaintiffs sued the Goldman Sachs Group (GPS) to demand a reduction in employee compensation based on the prediction GPS would announce excessive employee compensation. When GPS announced a lower level of compensation, plaintiffs, claiming that the action had attained its objective, moved for a voluntary dismissal and for an award of legal fees.  In affirming Supreme Court’s denial of legal fees, the court wrote:

Plaintiffs argue that Business Corporation Law § 626(e) (quoted in pertinent part at footnote 5, supra) does not expressly require a showing that the demand requirement was complied with or excused as a prerequisite to an award of attorneys’ fees for bringing an action that brought a substantial benefit to the corporation (as plaintiffs claim—and defendants deny—that this action did). Plaintiffs further argue that there is no reason to construe the statute to imply such a requirement. We disagree. * * *

The demand requirement, far from being a meaningless formality, “rests on basic principles of corporate control–that the management of the corporation is entrusted to its board of directors, who have primary responsibility for acting in the name of the corporation and who are often in a position to correct alleged abuses without resort to the courts. The demand requirement thus relieves the courts of unduly intruding into matters of corporate governance by first allowing the directors themselves to address the alleged abuses. The requirement also provides boards with reasonable protection from harassment on matters clearly within their discretion, and it discourages strike suits commenced by shareholders for personal rather than corporate benefit” … . Central Laborers’ Pension Fund v Blankfein, 2013 NY Slip Op 05857, 1st Dept 9-17-13