Shareholder derivative claims; BCL § 626 demand requirement; wrongful refusal; discovery; standing
By Joshua Goldman┃Editor-In-Chief
Plaintiffs are GE shareholders. Plaintiff 1 became a shareholder in August 2004 and Plaintiff 2 in January 2009. In early 2008, one of GE’s subsidiaries, contributing 50% of GE’s earnings, began to decline. In response to shareholder concern, GE stated it would maintain a $.31 per share quarterly dividend. From September 2008 until December 2008, GE’s executives continually told shareholders GE would maintain this $0.31 quarterly dividend throughout 2009. In early February 2009, seven GE executives sold $5 million of personal shares. Two weeks later, GE announced it would drop its dividend to $0.10 per share. Plaintiffs wrote letters in 2010 and 2012 to the GE board demanding it investigate and take legal action against these officers. The board referred the demands to its audit committee for consideration and recommendation. Ultimately, a group of eleven non-management directors voted not to pursue legal action against the seven executives. Plaintiffs commenced their own derivative actions on behalf of GE. Plaintiff’s claims were consolidated by the court because they both alleged breach of fiduciary duties, waste of corporate assets, and unjust enrichment and sought indemnification and contribution from defendants. Defendants argued plaintiffs did not satisfy the demand requirement of BCL § 626(c); Plaintiffs were not entitled to discovery; and under BCL § 626(b), Plaintiff 2 lacked standing with regard to conduct that occurred prior to his becoming a GE shareholder. The court held BCL § 626(c) required plaintiffs plead with particularity not only a demand was made, but also refusal of the demand was wrongful. Plaintiffs showed two letters were served upon the board in 2010 and 2012, but not wrongful refusal. To show wrongful refusal, plaintiffs needed to show the committee lacked independence or, the board lacked independence, used inadequate or inappropriate procedures, or acted in bad faith when it voted to refuse plaintiffs’ demands. Defendants argued that shareholder who makes a demand waives his right to argue a board is not independent. The court refused to adopt this view, but determined the committee and board were not interested because a group of eleven non-management directors decided to refuse plaintiffs’ demands, not the committee or the board. Since plaintiffs failed to show the committee or board were interested or lacked independence, the board’s alleged reliance on the committee was insufficient to show inappropriate procedures. In addressing bad faith, the court stated plaintiffs must show the audit committee members were interested or lacked independence. Although four of the six audit committee members were named as wrongdoers, plaintiffs did not show they (1) promoted their own personal interests, (2) failed to perform their duties as directors and audit members, and (3) profited improperly at the expense of GE. The court held the audit committee was not interested nor did it lack independence. Because plaintiffs failed to satisfy the demand requirement, the court held they were not entitled to discovery. The court held Plaintiff 2 had standing to sue, but only for actions taken after he became a stockholder in January 2009. The court granted defendant’s motion to dismiss under CPLR § 3211(a)(7) with leave to replead with respect to Plaintiff 1. As for Plaintiff 2, the complaint was dismissed without leave to replead to the extent he asserted causes of action related to alleged actions prior to the date he purchased stock.
Kenney v Immelt, Index No. 650542/2012, 5/8/2013 (Bransten, J.).