In a pair of decisions last year, Lerner v. Prince and North Miami Beach v. McGraw-Hill, the First Department signaled a change in the way shareholders in New York corporations can, and likely will, challenge the conduct of their boards.1 Both cases grew out of the sub-prime mortgage-related asset disaster, but they should apply with equal force to any New York corporation, whether it is a public company, a closely-held family company, or an apartment cooperative.
The Demand Requirement
The statutory demand requirement is the first obstacle for shareholders concerned about possible misfeasance, malfeasance or nonfeasance by their board of directors. Without satisfying the demand requirement, shareholders have no standing to maintain a derivative suit on behalf of the corporation against the members of the board. The first strategic considerations are whether, how and when to make a demand upon the board to investigate and root out the suspected conduct. The complaint must allege either demand and wrongful refusal or demand futility. In either instance, a heightened pleading standard applies, requiring the complaint to state with particularity how the demand was made and wrongfully refused or why demand would have been futile. New York Bus. Corp. Law §626(c) (2010) (requiring that the complaint “set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort”).
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