In Union de Empleados de Mulles de Puerto Rico PRSSA Welfare Plan v. UBS Financial Services, the US Court of Appeals for the First Circuit held that appeals of dismissals based on a party's failure to plead demand futility in a shareholder derivative complaint are subject to de novo review. This ruling clarifies the First Circuit's standard and makes it easier for plaintiffs to appeal dismissals of this type.
According to Federal Rule of Civil Procedure 23.1(b)(3), the plaintiff in a shareholder derivative action must state any effort made to obtain the desired action from the directors of the corporation in the complaint. If the plaintiff did not demand the desired action from the directors, the plaintiff must instead state the reasons for not obtaining the action or making the effort. A matter can be dismissed if a plaintiff pleading this "demand futility" fails to do so properly.
In a January 4, 2013 opinion, Union de Empleados de Muelles de Puerto Rico PRSSA Welfare Plan v. UBS Financial Services of Puerto Rico, the US Court of Appeals for the First Circuit held that a district court's dismissal of a shareholder derivative suit based on a failure to properly plead demand futility is reviewed de novo. This clearly articulates the Circuit's standard and makes it easier for plaintiffs to appeal district court dismissals of this type.
Previously, the First Circuit had no clearly established standard of review for these cases. Other circuits traditionally reviewed the dismissal of a derivative suit based on a failure to properly plead demand futility merely for abuse of discretion. However, recent expressions of skepticism from other circuits have led some courts to question the appropriateness of this standard of review, a trend that has also been reflected in state courts. In adopting its new standard, the First Circuit reasoned that because it reviews the legal sufficiency of pleadings de novo, there is no reason to treat the pleadings in a derivative suit differently.
In applying its new de novo standard, the First Circuit determined that the plaintiff had sufficiently pleaded demand futility in its complaint, and that the district court had erred in its dismissal. The Circuit Court vacated the decision and remanded the matter to the US District Court for the District of Puerto Rico for further proceedings.