Where a shareholder’s purported demand on a company merely complained about certain corporate-related activity but did not require any action be taken, it did not satisfy the statutorily required “pre-suit demand” needed to maintain a derivative action. JT Russell and Sons, Inc. v. Russell, 2024 NCBC 14 (J. Conrad). Without having served a statutorily compliant pre-suit demand, Plaintiff lacked standing to assert any derivative claims and the claims required dismissal.

Defendant is a shareholder, former officer and former director of Plaintiff.  Following Defendant’s termination by Plaintiff’s Board, Plaintiff filed suit against Defendant alleging self-dealing and other misconduct.  Defendant filed a counterclaim, asserting several direct and derivative claims. Prior to filing his counterclaim, Defendant had sent a letter to Plaintiff’s Board setting out a list of potential “Claims” that he might bring against Plaintiff.  However, the letter did not demand that the Company take any action at all in relation to the Claims.  After Defendant filed his counterclaim that contained several derivative claims, Plaintiff filed a motion to dismiss contending, as it related to the derivative claims, Defendant had failed to make the required pre-suit demand.

The Business Court agreed and dismissed Defendant’s derivative counterclaims.  Recognizing that “our courts have held with crystal clarity” that a list of claims directed to a company, without more, is not a proper demand (Opinion, ¶14), the Business Court recognized that Defendant’s letter listing his potential “Claims” was insufficient.  While acknowledging that the pre-suit demand does not need to ask a company to sue the wrongdoer in order to satisfy the statutory requirements (Id., ¶15), the Business Court nonetheless held that the pre-suit demand must ask for some action to be taken and, because Defendant’s letter failed to demand any action be taken, it was insufficient. Id.  Moreover, the Business Court made clear that merely putting a company “on notice” of misconduct is, at best, an implied demand for action, but that the statute requires a direct demand for action.  (Id., ¶16).

Based upon this decision, any company receiving a shareholder demand should examine it carefully to determine whether the written letter/notice demands the company take some action and, if it does not, then know that any future suit may be subject to dismissal.