Virginia Code § 13.1-672.1(B)(1) contains a written demand requirement before a shareholder is able to file a derivative action on behalf of a corporation. Under Virginia law, a shareholder has no standing to maintain a derivative suit unless he first makes a written demand that the corporation bring suit in its own right.
In a recent case, the defendants, who are shareholders of a closely-held Virginia corporation along with the Plaintiff, claimed that Plaintiff did not meet the written demand requirement. In the written opinion, the court laid out the specific requirements of a demand.
In this case, the corporation was in the business of developing and managing restaurants. In January 2008, Plaintiff claimed the defendants refused to provide him with any information concerning the corporation and essentially kept him out of the loop regarding the corporation. Plaintiff also alleged that the defendants independently without his involvement opened another restaurant.
Plaintiff hired an attorney to send a letter to defendants, demanding access to the company’s financial records, to which a shareholder is permitted access. When no response was received, he sent a follow-up letter giving the defendants notice pursuant to Virginia Code § 13.1-774 that Plaintiff, as a shareholder owning more than 5% of the corporation, was entitled to the corporation’s financial records.
This case presented a question of first impression: what components must a document have before it can be deemed to satisfy Virginia’s written demand requirement?
The court recognized that the form of the demand is not specified in the statute except to require that it be in writing. However, after analyzing several North Carolina cases, which evaluated a statue almost identical to the Virginia statute, the court determined certain overarching principals:
First, the purpose of the statutory demand requirement is to put the corporation on notice of a shareholder’s objection to an alleged wrong to give the corporation an opportunity to fix it. Second, a plaintiff cannot bring a derivative action seeking redress of wrongs not addressed in his written demand. Third, a written demand need not discuss any specific legal theory nor every salient fact ultimately asserted in a plaintiff’s complaint, so long as the contents of the written demand are sufficiently clear and particular to put the corporation reasonably on notice as to the substance of the plaintiff’s objections and allow the corporation to address them. See Op at 5.
The Court will thus consider (I) whether the document at issue identifies an alleged wrong, (2) whether the document demands action on the part of the corporation or its officers to redress the
alleged wrong, (3) whether the demands in the document are clear and particular enough to have put the corporation reasonably on notice as to the substance of the alleged wrong and allow the
corporation to assess its rights and obligations with regard to the alleged wrong, and (4) whether the alleged wrong and the claims asserted in the plaintiffs complaint are sufficiently connected. Op. at 6.
In the instant case, plaintiff’s two letters provided several alleged wrongs, including failure to provide plaintiff with Schedule K-1’s and federal income tax returns, failure to file tax returns, and breach of fiduciary duty associated with failure to allow plaintiff access to the corporation’s financial records without court intervention. Plaintiff did not merely inquire about these failures; he clearly and particularly demanded that they be redressed. The court found this sufficient to put the corporation on notice about the substance the alleged wrongs and give the corporation the opportunity to remedy the situation.
Thus, the court held that plaintiff’s letters constituted “written demands” within the meaning of Virginia Code § 13. 1-672. I (B)(1), and any wrong addressed therein may properly form the basis of a derivative action.
Plaintiff’s complaint, however, also included a claim that defendant usurped corporate opportunities by opening the additional restaurant. The written demands failed to include mention of usurpation of corporate opportunities. Therefore, the court found that Plaintiff did not sufficiently demand redress of this claim and so he was not permitted to seek redress of any alleged usurpation.
As a result of this case, shareholders wishing to bring derivative suits must ensure that their written demands prior to bringing the derivative action:
(1) identify an alleged wrong,
(2) demand action on the part of the corporation or its officers to redress the alleged wrong,
(3) clearly put the corporation on notice as to the substance of the alleged wrong and allow the corporation to assess its rights and obligations with regard to the alleged wrong, and
(4) ensure that the alleged wrong and the claims asserted in the plaintiffs complaint are sufficiently connected.