Gordon & Rees New York partner Joseph Salvo and senior counsel Adam Furmansky recently secured dismissal of a shareholder derivative action venued in New York Supreme Court’s Commercial Division.
The plaintiff, an owner of cooperative shares at a luxury cooperative apartment building, commenced suit on behalf of all shareholders of the cooperation apartment building (“Cooperative”) under the New York Business Corporation Law (“BCL”) §626. The plaintiff alleged that Gordon & Rees’ client, the managing agent of the Cooperative (“Managing Agent”), engaged in a fraudulent scheme to rig the garage lease bidding process. Specifically, it was alleged that the Managing Agent, which was tasked with the responsibility to locate and negotiate a new garage lease on behalf of the Cooperative, breached its fiduciary duty by improperly steering the Cooperative’s Board of Directors (“Cooperative Board”) to a favored garage operator of the Managing Agent.
The Gordon & Rees team promptly filed a motion to dismiss the complaint, arguing that the plaintiff failed to make a pre-suit demand on the Cooperative Board as required under the BCL, thereby depriving the Cooperative’s Board the opportunity to become informed about the alleged misconduct and weigh available alternatives. The Gordon & Rees team also argued that the plaintiff failed to plead demand futility in the complaint; failed to allege that (1) a majority of the directors were interested in the transaction, or (2) the Cooperative Board’s directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the Cooperative Board’s directors failed to exercise their business judgment in approving the transaction.
In granting the motion to dismiss, the Court held that the plaintiff’s questions posed to the Cooperative Board about the selected garage operator did not amount to a pre-suit demand on the Cooperative Board. The Court also agreed with the Gordon & Rees team that the complaint failed to plead demand futility. The Court held that, under the circumstances, the Cooperative Board acted in a reasonable manner and the challenged transaction was not so egregious on its face that it could not have been the product of sound business judgment of the directors. The Court therefore dismissed the complaint and denied the plaintiff’s request to amend the complaint.