The U.S. District Court for the District of Massachusetts recently dismissed a derivative action where plaintiffs did not make a pre-suit demand on defendant’s board and failed to adequately plead that demand would have been futile.
Defendant Smith & Wesson Holding Corporation’s former director of international sales was indicted for violating the Foreign Corrupt Practices Act of 1977 (FCPA). Plaintiffs Frank Holt and other shareholders of Smith & Wesson brought a derivative action against members of the board for failing to have effective FCPA controls and oversight, thereby breaching their duty of care. Plaintiffs failed to make a pre-suit demand on the Smith & Wesson board and argued that demand would have been futile because the Smith & Wesson board was not disinterested. Plaintiffs further argued that the requirement to show demand futility may be relaxed where evidence of liability is gross, as they alleged. Defendant argued that demand was required and moved to dismiss plaintiffs’ complaint.
The District Court first found that the doctrine of issue preclusion entitled defendant to dismissal where, in another derivative action against Smith & Wesson, a different court found that demand on the Smith & Wesson board was not futile. The District Court further held that the pleadings fell far short of the necessary threshold to excuse demand, which requires plaintiffs to plead particularized facts creating a reasonable doubt that the board could have exercised disinterested business judgment when the complaint was filed.
Holt v. Golden, C.A. No. 11-cv-30200 (D. Mass. July 25, 2012).