Plaintiff, a significant (42.5%) minority shareholder of the corporate defendant, filed a derivative action against the corporate defendant. The Court characterized the case as "a domestic case disguised as a derivative action." The Court looked to the law of Virginia, the place of the incorporation of the company, to determine the appropriate prerequisites.
The claims
This action sought to enjoin a merger involving a publicly traded company. The Court addressed whether the action was derivative or direct under Delaware law. If it was derivative, the Court held that the complaint suffered from three flaws: it was not verified, the corporation had not been joined as a party, and there were
The Court considered an award of attorneys fees following its determination that certain termination provisions of a merger agreement were invalid. This opinion was issued in tandem with opinion in In re Quintiles Transnational Shareholders Litigation.
Fee applications were made by attorneys representing a class of shareholders, as well as attorneys representing a derivative
Plaintiff was not entitled to proceed on its derivative action seeking to enjoin a merger because it had not waited for the 90 day period required by N.C.G.S. §55-7-42. Plaintiff failed to sufficiently plead irreparable harm, which might have excused it from waiting the 90 day period.
It was not irreparable harm that the company’s
The Court found that a demand made simultaneously with the filing of a complaint was insufficient to satisfy the derivative action demand requirement of N.C. Gen. Stat. §55-7-42. The purpose of this statutory scheme is to give a Board of Directors the opportunity "to fulfill its duties before the corporation incurs legal expenses or the
The Court discussed the sufficiency of and underlying reasons for a demand by a derivative action plaintiff, and found that its demand was insufficient. Among other things, "the demand requirement reinforces the basic norms of corporate governance by protecting the ability of the directors to make a business judgment about what is in the best
Egelhof v. Szulik, 2008 NCBC 2 (N.C. Super. Ct. Feb. 4, 2008)(Tennille)
It’s hard to imagine a more inadequate plaintiff than Egelhof to undertake the fiduciary responsibility of being a plaintiff in a derivative action against Red Hat, a publicly traded company. Egelhof was only 24 years old, and held only a few hundred dollars of Red Hat’s stock. He had become a plaintiff in response to a solicitation on the internet. As the Court described Egelhof, "[h]e had little investing experience, no experience in litigation, no prior connection with the [his] law firm, no personal knowledge of [the corporation] and its operations, and a minor criminal record."
The Court concluded that this plaintiff "lacked any credentials to act as a fiduciary for a company in multi-million dollar litigation." Noting Egelhof’s paltry stake in Red Hat, the Court held that "[w]hile the size of ownership is not determinative of standing, a potential plaintiff’s lack of a real financial stake in the litigation is a warning sign that he or she may not be willing or able to devote the time necessary to fulfill the fiduciary obligations imposed by law on a shareholder derivative plaintiff."
These factors alone would probably not have warranted sanctions, but Egelhof was completely uninvolved in his case. He relocated, more than once, and never gave his lawyers a forwarding address. He sold his stock during the course of the lawsuit, creating a significant standing issue, but never mentioned this to his lawyers. He had never even met his lawyers until the night before his deposition and had spent a total of five hours on the case by the time he was deposed.
The Court’s sanction to Egelhof was to prohibit him from being a plaintiff in a class action or derivative action in North Carolina for the next five years. The lawyers came in for an equally harsh sanction. Continue Reading Sanctions For Derivative Action Plaintiff And His Lawyers
North Carolina law applied to the procedure for approval of a settlement of a derivative action involving a Delaware corporation.
The Court found that it was required to "balance (1) any legitimate corporate claims as brought forward in the derivative shareholder suit against (2) the corporation’s best interests . . . . Factors to be