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PLAINTIFF IN THIS DERIVATIVE STOCKHOLDER ACTION DID NOT SUFFICIENTLY ALLEGE THAT A DEMAND FOR RELIEF ON THE BOARD COULD BE EXCUSED, COMPLAINT PROPERLY DISMISSED (FIRST DEPT).

The First Department determined the complaint in this shareholder derivative action was properly dismissed for failure to first make a demand for relief on the board. The Rales criteria were not met:

Under Rales, “a court must determine whether . . . the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand” … . The ” mere threat of personal liability . . . is insufficient to challenge either the independence or disinterestedness of directors'” … . However, “a substantial likelihood” of liability “disables [a director] from impartially considering a response to a demand by” a stockholder … .

“Where, as here, directors are exculpated from liability except for claims based on fraudulent, illegal or bad faith conduct, a plaintiff must . . . plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had actual or constructive knowledge that their conduct was legally improper” … .

Even though the complaint alleges that BMS’ audit committee and senior management knew about gaps in the company’s internal controls, it fails to establish bad faith or scienter … .

Plaintiff’s contention that defendants face a substantial likelihood of liability because they signed 10-K’s that contained false statements is also unavailing. It is true that “when directors communicate publicly . . . about corporate matters[,] the sine qua non of directors’ fiduciary duty to shareholders is honesty” … . However, “to establish liability for misstatements when the board is not seeking shareholder action, shareholder plaintiffs must show that the misstatement was made knowingly or in bad faith” … . Deckter v Andreotti, 2019 NY Slip Op 01717, First Dept 3-12-19

 

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