He reports:
WeWork is a Delaware corporation, but the lawsuit was filed in the California Superior Court. California Corporations Code Section 800 provides that no action may be instituted or maintained in the right of a domestic or foreign corporation unless specified conditions are met. One of these conditions is:
"The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file."
Superficially, this appears to be a standard "demand futility" pleading requirement. The California statute, however, adds an additional requirement that must be met before a derivative action is filed. In Re v. Weksel, 130 A.D.2d 640 (1987), the Appellate Division of the New York Supreme Court applied the same language in former Section 15702(a)(2) (governing derivative suits by domestic or foreign limited partnerships) to dismiss a plaintiffs' suit:
Although the complaint alleges why the plaintiffs believe that a demand upon the general partner would be futile, it does not state that the limited partnership or the general partner were informed in writing concerning the ultimate facts of each action or that a true copy of the complaint was delivered to either the limited partnership or the general partner, as California law requires (see, Cal Corp Code § 15702 [a] [2]). Therefore, the plaintiffs' first cause of action must be dismissed as against the appellants.
Kevin LaCroix has a lengthy and detailed analysis of the lawsuit here.
While there is a lot going on here, and while the events that occurred after the company withdrew its IPO initiative, at one level this lawsuit is a failure to launch claim. Among the claimant’s grievances is the company’s failure to complete the IPO. This aspect of the case is a reminder that a lot can happen to companies on an IPO track, and if a would-be IPO company hits an obstacle and fails to complete the hoped-for offering, the company can get hit was a failure to launch lawsuit. This is important to remember because in that situation, the D&O insurance policy that will respond to the claim (and indeed the D&O insurance policy that will be responding to WeWork’s new lawsuit) is a private company D&O insurance policy. The possibility of these kinds of lawsuits is important to take into account when the pre-IPO company’s insurance coverage is being structured. Among other things, the policy’s Securities Claim exclusion must be worded in a way that it does not preclude coverage for these kinds of claims.
