Last December, I wrote about U.S. District Court Judge Jeremy Fogel’s decision in Johnson v. Myers, 2011 U.S. Dist. LEXIS 112897 (N.D. Cal. Sept. 30, 2011). The case involved an attempt by some of the stockholders of a liquidated Scottish corporation to maintain a breach of contract action derivatively. The contract at issue included a California choice of law provision. Judge Fogel therefore ruled “In cases in which the parties have made choice-of-law arguments based upon both contractual clauses and the internal affairs doctrine, the Ninth Circuit (applying California law) and the California Supreme Court both have analyzed the choice-of-law clauses before the internal affairs doctrine.” (emphasis added). He then dismissed the complaint because the plaintiffs had failed to allege standing as required by Corporations Code Section 800(b) which provides in relevant part:
No action may be instituted or maintained in the right of any domestic or foreign corporation by any holder of shares or voting trust certificates of the corporation unless both of the following conditions exist:
(1) The plaintiff alleges in the complaint that the plaintiff was a shareholder, of record or beneficially . . . at the time of the transaction or any part thereof complained of . . .
(2) The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.
(emphasis added).
The case was reassigned to Judge William Alsup in San Francisco and the plaintiffs sought leave to amend the complaint in order to address the pleading deficiencies with respect to Section 800(b). A few weeks ago, Judge Alsup denied the plaintiffs’ motion in Johnson v. Myers, 2012 U.S. Dist. LEXIS 38471 (N.D. Cal. Mar. 21, 2012). In doing so, he ruled that “In a federal diversity action, the court looks to state law to determine whether the plaintiff has complied with the demand requirement or has sufficiently pleaded why making such a demand would be futile and should be excused. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96, 111 S. Ct. 1711, 114 L. Ed. 2d 152 (1991)”.
Note that Corporations Code Section 800(b) by its express terms applies to both domestic corporations (defined in Section 167 as a corporation formed under the laws of California) and foreign corporations (defined in Section 171 as any corporation other than a domestic corporation). Thus, there can be no doubt that the California legislature intended to apply Section 800(b) to corporations not formed under California law. Note too that Section 800, unlike Rule 23.1 of the Federal Rules of Civil Procedure, includes an additional pleading requirement: the plaintiff must allege that she “has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file“. Failure to comply with this additional pleading requirement deprives a shareholder of standing. See There’s Something About Section 800 And ISS Adds A Panelist.
