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A shareholder acting on behalf of a corporation may bring
a "derivative suit" against corporate directors and management for fraud,
mismanagement, self-dealing or dishonesty. Before bringing such a suit, the
shareholder must make a written demand that clearly identifies the alleged
wrong and demands the corporation take action to redress it. A court will
examine a complaint and a written demand to insure that they are sufficiently
connected. A Norfolk Circuit Court recently addressed the sufficiency of a
demand letter in Williams v. Stevens and Dornemann.
Alex Williams, Eric Stevens and Karl
Dornemann were the sole shareholders of Dogsbollocks, Inc., a corporation
that managed restaurants. Williams alleged that Stevens and Dornemann (the
defendants) prevented him from involvement with the corporation and refused to
give him pertinent corporate information. He also alleged that the defendants
developed a restaurant independently. Williams' attorney sent two letters to
the defendants. The first letter demanded access to the corporation's financial
records and requested the name of the corporation's accounting firm, and the second
letter accused defendants of ignoring the first letter and gave the defendants
notice that Williams was requesting financial records pursuant to Virginia Code
§ 13.1-774. Williams later filed a derivative suit. In response to an Amended
Complaint, defendants filed a plea in bar,
arguing that Williams' suit was barred because he failed to make a written
demand before bringing the derivative action. Williams contended that his two
letters fulfilled the demand requirement.
The court considered what components a document must
contain in order to satisfy the written demand requirement. No Virginia court
had previously addressed the question, so the court looked to rules established
in North Carolina, where the demand requirement is almost identical to
Virginia's. Neither state's statutes specify the form of the demand other than requiring
it to be written. North Carolina courts have held that the document should set
forth the facts of share ownership and describe the remedy demanded with enough
specificity to allow the corporation to correct the problem or bring a lawsuit
on its own behalf. See e.g., LeCann v. CHL II, LLC, 2011 NCBC 29 (2011) [an enhanced version of this opinion is available to lexis.com
. In North Carolina, emails, sworn affidavits and letters
have satisfied the written demand requirement where they identified the
allegedly wrongful acts and demanded redress in a clear and particular manner
sufficient to put the corporation on notice as to the substance of the
Read the rest of the article
at the Virginia
Business Litigation Lawyer blog.
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