A shareholder who sues directors and officers for the benefit of the corporation — derivatively — often has to clear a high pleading hurdle. She must specify why she couldn’t trust the board of directors to decide whether or not the corporation should take action against the wrongdoers, usually because of a conflict of interest — "demand futility", for short.
The Third Circuit held today that such a shareholder sometimes may use information she obtains after filing a derivative lawsuit to amplify her original (and inadequate) demand futility allegations. The "sometimes" in the case before the court involved discovery that the defendants agreed to provide to the plaintiffs. Ordinarily, you see, a plaintiff may not try to bolster conclusory allegations of demand futility through compulsory discovery. In re Merck & Co., Inc. Securities, Deriv. & ERISA Litig., No. 06-2911 (3d Cir. July 18, 2007)
The lawsuit, by the way, involves claims against officers and directors of Merck for letting the company sell VIOXX despite (the plaintiffs assert) knowing of its possible lethality.