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In Apple Inc. v.
Superior Court, No. H044133, 2017 WL 6275830 (Cal. App.
Dec. 11, 2017), the California Court of
Appeal, Sixth District, considered whether a plaintiff
asserting a shareholder derivative lawsuit must plead demand
futility with respect to the board of directors in place at the
time of the filing of the amended complaint or the
initial complaint, when the composition of the board has
changed in the interim. The Court of Appeal, following the rule
enunciated by the Delaware Supreme
Court in Braddock v.
Zimmerman, 906 A.2d 775 (Del. 2006), concluded that
pleading of demand futility must be assessed with respect to the
board of directors in place at the time the amended complaint is
filed. This decision reflects the tendency by California courts to
look to Delaware corporate law on issues related to shareholder
derivative litigation.
Plaintiffs (purported Apple shareholders) brought this
derivative action on behalf of Apple claiming that certain current
and former members of the company's board of directors breached
their fiduciary duties. The lawsuit asserted that Apple pursued and
enforced anticompetitive agreements with other Silicon Valley
companies to prohibit the recruitment of each other's
employees. Plaintiffs alleged that Apple's board of directors
was aware of or tacitly approved Apple's alleged practices.
Apple is incorporated under California law.
The Superior Court sustained demurrers to plaintiffs'
initial complaint filed in September 2014, with leave to amend.
Plaintiffs filed amended complaints in June 2015 and again in April
2016. Defendants demurred to the operative amended complaint on
several grounds. Among them, defendants argued that plaintiffs
failed to make a litigation demand to the company or to allege with
particularity pursuant to Section 800(b)(2) of
the California Corporations Code why such demand would be futile.
Defendants argued that, based upon the rule in Braddock,
plaintiffs were required to allege demand futility with respect to
Apple's then-current board as it existed in 2016 when then
operative amended complaint was filed.
The Superior Court declined to apply Braddock, noting
that Apple is a California corporation and failed to cite
California authority supporting the argument that the relevant
board was the board in place as of the time of the filing of the
amended complaint. The court held that the operative complaint met
the demand excusal requirement for at least half of the 2014
board.
Following a writ petition by defendants, the Court of Appeal
concluded that the principles governing derivative litigation in
California are consistent with Braddock. Thus, when a
trial court determines that derivative claims are legally
insufficient and grants leave to amend, the demand requirement must
be reassessed against the disinterest and independence of the board
of directors in place when the amended derivative claims are filed.
Since the filing of the original action and the first amended
complaint, certain Apple board members had changed. The Court
concluded that the operative complaint failed to adequately plead
excusal from the demand requirement as to a majority of the
eight-member board in place in 2016. Accordingly, the Court of
Appeal vacated the Superior Court's order and entered a new
order sustaining defendants' demurrer to the operative
complaint with leave to amend.
This decision clarifies the California demand futility pleading
requirement where a demurer has been sustained and leave to amend
granted. Where the complaint is not yet "validly in
litigation," demand futility must be reassessed at the time of
the filing of the amended complaint. As such, any changes in the
composition of a company's board between the time of the filing
of the initial complaint and amended complaint may impact the
demand futility analysis and bear on a plaintiff's standing to
pursue a shareholder derivative lawsuit.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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