Attorneys that represent shareholders of publicly traded companies in securities litigation are intimately familiar with the pre-suit demand required by the corporate law of many states. The purpose of the demand is to give the board of a company an opportunity to investigate and remedy alleged wrongdoing on the company’s behalf before a shareholder is permitted to bring a derivative action. In many states, including Delaware, a potential plaintiff is not required to make a pre-suit demand when the board is not capable of making an independent decision—typically because board members are accused of wrongdoing themselves. Pennsylvania’s business corporation law (BCL) does not include a “futility” exception and requires the prospective derivative plaintiff to make a pre-suit demand in nearly all circumstances.

Whatever the merits of Pennsylvania’s universal demand requirement for litigation involving companies with many shareholders, its justification breaks down in disputes involving closely held businesses. Absent a persuasive justification, it amounts to a procedural trap for the unwary practitioner. A recent decision from the Eastern District of Pennsylvania is a reminder of the hazard.

Pennsylvania’s ‘Universal Demand’ Requirement

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