Opinion ID: 895120
Heading Depth: 2
Heading Rank: 1

Heading: Must a Demand Identify a Shareholder?

Text: Article 5.14 does not expressly state that a presuit demand must list the name of a shareholder. But because parts of the article and most of its purposes would be defeated otherwise, we hold that a demand cannot be made anonymously. The statute here provides that [n]o shareholder may commence a derivative proceeding until ... a written demand is filed. [20] It expressly limits standing to shareholders who owned stock at the time of the act or omission complained of. [21] It requires that the demand state the the subject of the claim or challenge that forms the basis of the suit. [22] And it tolls limitations for 90 days after a written demand is filed. [23] Given the interrelation between the demand and the subsequent suit, it is hard to see how or why the demand could be made by anyone other than the shareholder who will file the suit. Of course, requiring the demand to come from the putative plaintiff is not the same as requiring that it state the plaintiff's name. But for several reasons we believe it must. First, article 5.14 presumes that a corporation knows the identity of the shareholder making the demand. The article prohibits filing suit until 90 days after the demand unless the shareholder has earlier been notified that the demand has been rejected. [24] The tolling provision suspends limitations for the shorter of 90 days or 30 days after the corporation advises the shareholder that the demand has been rejected. [25] For a corporation to notify or advise the shareholder of rejection, it must know who the shareholder is. Second, the identity of the shareholder may play an important role in how the corporation responds to a demand. The identity of the complaining shareholder may shed light on the veracity or significance of the facts alleged in the demand letter, and the Board might properly take a different course of action depending on the shareholder's identity. [26] In other words, a demand from Warren Buffett may have different implications than one from Jimmy Buffett. Third, a corporation cannot be expected to incur the time and expense involved in fully investigating a demand without verifying that it comes from a valid source. Article 5.14 sets out a procedure for independent and disinterested directors to conduct an investigation and decide whether the derivative claim is in the best interests of the corporation. [27] If they determine in good faith that it is not, the court must dismiss the suit over the plaintiff's objection. [28] It would be hard to imagine requiring these procedures, especially in cases like this one involving an imminent corporation merger, at the instance of someone who could in no event file suit. Finally, we are concerned with the potential for abuse if demands can be sent without identifying any shareholder. The letter here was on the letterhead of a California law firm whose principal prosecuted hundreds of stockholder derivative actions, [29] and later pleaded guilty to paying kickbacks to shareholders recruited for that purpose. [30] His actions have been described by one federal court as the cause of much of the criticism about derivative suits: A direct target of Congress, singled out for much of the criticism of lawyers who manipulate the securities laws to serve their own interest, was Milberg Weiss Bershad Hynes & Lerach (Milberg), whose name partner, William Lerach, known as the King of Strike Suits, had boasted, I have the greatest practice in the world because I have no clients. I bring the case. I hire the plaintiff. I do not have some client telling me what to do. I decide what to do. [31] There are no such allegations in this case, but it would be unwise to wait for them to occur before taking the possibility into account. We agree with Dillingham that by writing article 5.14's demand requirement in the passive tense (barring suit until a written demand is filed ), the Legislature did not require that shareholders send the demand personally, as opposed to having someone do so on their behalf. But requiring the demand to state a shareholder's name costs nothing; typing a name into the demand is not expensive and can cause no delay, assuming a shareholder exists who is entitled to make the claim. Construing article 5.14 as a whole, we hold that the demand required by the article must name the shareholder on whose behalf it is made. [32] Because the demand here did not do so, and did not even purport to be made on behalf of any shareholder, it was inadequate.