Attorney fee awards in shareholder derivative actions

George Bundy Smith: A great man-my co-author, former law partner and friend-passed away on Aug. 5, 2017. A man of incredible conviction and moral character, he served as a role model and mentor to so many. His actions and example left the world a far better place. He will be sorely missed.

When a plaintiff shareholder is successful in a derivative lawsuit brought on behalf of a corporation, New York Business Corporation Law §626(e) provides courts with the discretion to award reasonable expenses, including attorney fees, as reimbursement for those incurred in bringing the action on the corporation’s behalf. Success in such an action is measured by whether plaintiff achieved a "substantial benefit" for the corporation or its shareholders, but a substantial benefit alone will not entitle a plaintiff to reimbursement. Section 626 imposes other requirements that must be met to recover attorney fees, including that the plaintiff be a shareholder both at the time of the issue as well as commencement of the suit, and that such plaintiff make and plead with particularity a pre-suit demand upon the corporation or the circumstances why such a demand would have been futile.

This column addresses recent Commercial Division decisions evaluating claims for awards of expenses and attorney fees, pursuant to §626(e).

Section 626 (e)

Business Corporation Law §626 governs when a plaintiff is authorized to bring a derivative action on behalf of a domestic or foreign corporation. To do so, the plaintiff must be a shareholder of the corporation both at the time of the transaction complained of and when the suit was commenced. The plaintiff is required to plead with particularity her pre-suit demand upon the corporation’s board of directors or the reasons why such a demand would be futile. A shareholder derivative action cannot be discontinued, compromised or settled without court approval.

Section 626 also authorizes a court to award expenses, including attorney fees, to a successful plaintiff:

If [a derivative] action on behalf of the corporation is successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant or claimants as the result of a judgment, compromise, or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney’s fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. This paragraph shall not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them.

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