Shareholder Derivative Suit Dismissed for Failure to Show Demand Futility


The Supreme Court of the State of New York, County of New York recently dismissed a shareholder derivative suit on behalf of Travelzoo, Inc. because plaintiff shareholder failed to plead that demand on the board to sue would be futile. In 2009, Travelzoo, a global internet company, sold its Asia Pacific division to its then-chairman, founder and majority shareholder, Ralph Bartel, for $3.6 million. According to Travelzoo’s public filings, Bartel and Azzurro Capital, Inc.—a company owned 100% by Bartel—controlled the company and elected each of its board members at the time of the sale. Plaintiff’s claim alleged breach of fiduciary duties and unjust enrichment arising out of the sale.

Applying Delaware law, the court ruled that plaintiff did not plead facts sufficient to show that the required pre-suit demand on the board to take remedial action was futile as required by Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Examining both Aronson prongs, the court first held that plaintiff did not challenge the independence of the Special Committee, which recommended the sale. Next, the court held that the complaint did not plead with particularity sufficient facts to raise a reasonable doubt that the board acted in good faith. The court emphasized that plaintiffs should address allegations based on lack of information by examining the corporation’s books and records before filing suit; doing so will help plaintiffs plead with particularity the facts justifying demand excusal. The court dismissed the complaint and denied plaintiff’s request to replead.   

Kebis v. Azzurro Capital Inc., No. 650253/2012 (N.Y. Sup. Ct. Jan. 21, 2014).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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