John J. Tollefsen Complex Litigation Law Blog on Lawyers.com

In re F5 Networks, Inc., 207 P.3d 433 (Wash. May 21, 2009) (NO. 81817-7).

In a case of first impression, Washington’s Supreme Court decided that shareholders could sue on behalf of a Washington corporation without first making a demand on the board of directors if the demand would be futile.

Washington's corporate statute is based on the 1984 version of the Model Business Corporation Act, which did not contain the explicit universal demand requirement of the 2005 version of the MBCA. RCW 23B.07.400(2) provides:

No shareholder may commence a derivative proceeding until:

(1) a written demand has been made upon the corporation to take suitable action; and

(2) 90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period.

Long before RCW 23B.07.400(2) was passed by the legislature, the Supreme Court approved of shareholder derivative suits being brought in common law, though it observed that they were proper only when “it appears that the corporation is incapable of enforcing a right of action accruing to it or that its officers or directors are acting fraudulently or collusively among themselves or with others.” After reading all the derivative cases together with the statute, the Supreme Court held that Washington is a demand futility state.

The court concluded this result also follows from a plain reading of the statute itself. Again, in most relevant part, it requires shareholders seeking to bring a derivative lawsuit to “allege with particularity the demand made, if any, to obtain action by the board of directors and either that the demand was refused or ignored or why a demand was not made.” RCW 23B.07.400(2) (emphasis added).

Delaware Law Standard for Derivative Actions

The court considered whether Washington would specifically follow Delaware's demand futility standard. Delaware law, as the vice chancellor of the Delaware Chancery Courts noted, has at least “some modest importance in the American scheme of corporate governance.” According to the Delaware secretary of state, half of publicly traded corporations and more than 60 percent of the Fortune 500 have chosen to incorporate there. Under Delaware's standard, demand is excused if “under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” If the board of directors in place at the time demand would have been filed did not approve the challenged transaction, demand is excused if the complaint establishes reasonable doubt that the board could exercise “its independent and disinterested business judgment in responding to demand.”

Since Delaware's courts are well versed in this area, the court concluded: “Until our legislature declares otherwise, Washington is a demand futility state and follows Delaware.”