Court Adheres to Abuse of Discretion Review of Demand-Futility Dismissals in Shareholder Derivative Suits: Ninth Circuit | Practical Law

Court Adheres to Abuse of Discretion Review of Demand-Futility Dismissals in Shareholder Derivative Suits: Ninth Circuit | Practical Law

In Rosenbloom v. Pyott, the US Court of Appeals for the Ninth Circuit adhered to an abuse of discretion standard for reviewing demand-futility dismissals in shareholder derivative suits. The decision continues to make it more difficult for parties to appeal rulings dismissing shareholder derivative suits for demand futility in the Ninth Circuit, even as other courts have increasingly adopted de novo review of such dismissals.

Court Adheres to Abuse of Discretion Review of Demand-Futility Dismissals in Shareholder Derivative Suits: Ninth Circuit

by Practical Law Litigation
Published on 09 Sep 2014 • USA (National/Federal)
In Rosenbloom v. Pyott, the US Court of Appeals for the Ninth Circuit adhered to an abuse of discretion standard for reviewing demand-futility dismissals in shareholder derivative suits. The decision continues to make it more difficult for parties to appeal rulings dismissing shareholder derivative suits for demand futility in the Ninth Circuit, even as other courts have increasingly adopted de novo review of such dismissals.
On September 2, 2014, in Rosenbloom v. Pyott, the US Court of Appeals for the Ninth Circuit adhered to an abuse of discretion standard for reviewing demand-futility dismissals in shareholder derivative suits. The decision continues to make it more difficult for parties to appeal rulings dismissing shareholder derivative suits for demand futility in the Ninth Circuit, even as other courts have increasingly adopted de novo review of such dismissals. (No. 12-55516, (9th Cir. Sept. 2, 2014).)
Plaintiffs, all shareholders of defendant Allergan, a pharmaceutical manufacturer, filed a derivative action in the US District Court for the Central District of California, alleging that Allergan's directors were liable for breaches of their fiduciary duties. Before filing suit, plaintiffs did not make a demand on Allergan's board requesting that the company file suit in its own name.
Allergan moved to dismiss for failure to adequately allege demand futility. According to FRCP 23.1(b)(3), plaintiffs in a shareholder derivative action must state any effort made to obtain the desired action from the directors of the corporation in the complaint. If the plaintiffs did not demand the desired action from the directors, plaintiffs must instead state the reasons for not obtaining the action or making the effort. A derivative action can be dismissed if the plaintiffs fail to plead "demand futility" with particularity.
The district court dismissed the action, concluding that plaintiffs failed to allege particularized facts showing that demand was excused.
On appeal, the Ninth Circuit concluded that it was bound by its precedents to review the district court's demand-futility dismissal for abuse of discretion, and declined plaintiffs' request to adopt a de novo standard of review. Applying an abuse of discretion standard, however, the court concluded that demand was excused, and reversed and remanded to the district court for further proceedings.
In a special concurrence, Judge Reinhardt emphasized the need for reconsideration of the applicable standard of review for demand-futility dismissals in shareholder derivative suits, particularly given that:
  • There is a circuit split on the issue.
  • Other courts have expressed skepticism as to abuse of discretion review of demand-futility dismissals.
  • Several circuits, including the First, Sixth, Seventh and Eighth Circuits, have adopted de novo review of such dismissals.
  • The US Supreme Court granted certiorari on the issue last year (although the case settled before oral argument).
The decision continues to make it more difficult for parties to appeal rulings dismissing shareholder derivative suits for demand futility in the Ninth Circuit, even as other courts have increasingly adopted de novo review of such dismissals.