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U.S. Court In Illinois Says Shareholder Should Have Waited Reasonable Time Before Filing Derivative Suit

 
 

HLD, v. 32, n. 9 (September 2004)

U.S. Court In Illinois Says Shareholder Should Have Waited Reasonable Time Before Filing Derivative Suit

In 2003, a subsidiary of Abbott Laboratories (Abbott), CG Nutritionals (CG), settled with the government on claims of fraud involving the overcharging of the Medicare program. Abbott paid a $600 million fine and CG pled guilty to one count of obstruction of a criminal investigation. Dennis MacCoumber (plaintiff), as a shareholder, made a pre-suit written demand, as required by Ill. Comp. Stat. 5/7.80, on Abbott's Board of Directors (Board) requesting it to sue the directors for damages for breach of fiduciary duty for failing to properly oversee CG, which cost the company $600 million. The Board responded by informing plaintiff that three shareholder derivative suits had been filed against it based on the same allegations and the plaintiffs in the suits claimed a pre-suit demand would be futile, which the Board challenged. The Board advised plaintiff that would monitor the litigation to see how the futility issue was decided and also told plaintiff it did not have the time to respond to the demand letter while defending against the suits, but would address the demand letter later. In December 2003, plaintiff brought a shareholder derivative suit against the Board (defendant), and defendant moved to dismiss on the grounds plaintiff failed to sufficiently plead its claim that defendant wrongfully refused to respond to the demand letter or in the alternative to stay the case pending resolution of the three other shareholder derivative suits.

The U.S. District Court for the Northern District of Illinois granted defendant's motion to dismiss. The court first addressed the requirements of a pre-suit demand letter in a shareholder derivative suit and noted that a pre-suit demand is required before a derivative action can be brought, unless the demand would be futile, and the purpose of the demand is to allow a board to remedy the shareholder's complaint. Once the demand is received, a board must investigate the claim and then decide what action to take, said the court. The power to sue is given to the board and a court must defer to the board's decision to sue or not unless it does not meet the "reasonable business judgment" rule. The burden of proof is on the shareholder to show that the board's judgment was unreasonable, and a board must be given a reasonable amount of time to investigate the claims in a demand. The court concluded that plaintiff failed to give defendant a reasonable amount of time after sending the demand letter until it sued. The demand letter was sent in September 2003, defendant responded in October 2003 by telling plaintiff it would consider the demand letter once the futility issue had been decided in the three existing suits, but plaintiff decided not to wait for the outcome of the futility issue before suing in December 2003. The court determined that defendant's decision to postpone responding to plaintiff's demand letter until the other litigation was resolved was not unreasonable. Because the court determined that plaintiff's case was filed prematurely, the court dismissed the suit without prejudice.

MacCoumber v. Austin, No. 03 C 9405, 2004 WL 1745751 (N.D. Ill. Aug. 2, 2004). To read the case, go to http://www.ilnd.uscourts.gov/RACER2/index.html

    

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