The United States District Court for the District of Massachusetts recently granted a motion to dismiss a “demand excused” shareholder derivative suit on the basis that the suit was mooted by the plaintiffs’ subsequent demand letter. In re Sapient Corp. Derivative Litigation, No. 06-11963-JLT (D. Mass. May 29, 2008).
Plaintiffs filed separate derivative actions against Sapient in October of 2006 and then, in July of 2007, filed a verified consolidated shareholder derivative complaint. The complaint, which contained numerous claims under the Sarbanes-Oxley Act of 2002, §10(b) and §14(a) of the Securities Exchange Act of 1934, as well as breach of fiduciary duty and waste of corporate assets claims, stated that no demand was made prior to filing the complaint because such a demand would have been futile.
In August of 2007, Sapient filed motions to dismiss based upon plaintiffs’ failure to make a pre-suit demand and insufficient showing as to why a pre-suit demand should be excused. In October of 2007, a separate (but factually related ) Massachusetts state court action against Sapient was dismissed for failure to make a pre-suit demand as required by Delaware Chancery Court Rule 23.1. In an attempt to avoid a collateral estoppel argument in their federal court action, the plaintiffs served a demand on Sapient and then urged the court to stay proceedings until the Board considered their demand.
The federal court, in a decision that can be found here, then granted the defendant’s motion to dismiss the “demand excused” derivative action. In doing so, the court held that, by making a demand after filing their “demand excused” complaint, plaintiffs had mooted any claim of demand futility. Although all claims (except §14(a) under the Exchange Act) were dismissed with prejudice, the court indicated that plaintiffs could simply commence a “demand refused” action based were the Board to refuse plaintiffs’ demand.
