By Jerry Carter.  In an August 23, 2012 Order, the Washoe County Business Court recently determined that a shareholder derivative lawsuit against officers and directors of International Game Technology (“IGT”) was insufficient.  Nevertheless, the Court granted the shareholder derivative plaintiff leave to amend the complaint.

The plaintiff’s complaint attempted to allege derivative claims on behalf of IGT against officers and directors.  The attempted claims included breach of fiduciary duty for disseminating false and misleading information, breach of fiduciary duty for failing to maintain internal controls, breach of fiduciary duty for failing to properly oversee and manage the company, abuse of control, gross mismanagement, and breach of fiduciary duty based on insider trading.  The complaint was found to be insufficient in several respects.

Failure to Satisfy Demand Requirement

A shareholder derivative lawsuit must allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members.  In this case, the plaintiff failed to allege with particularity that it satisfied the demand requirement.  Although the plaintiff alleged that the corporation’s board of directors refused a demand, it did not allege why the board of directors did so.  Thus the  Court stated: “The Complaint fails to address why the Defendants wrongfully refused to pursue a corporate claim.  Therefore, absent pleading with particularity a wrongful refusal, Plaintiff does not have standing to pursue a derivative action.”

Statute of Limitations

An action for relief on the ground of fraud must be commenced within three years.  Here, the complaint alleged that “[t]he complete truth finally emerged]” on October 30, 2008.  The plaintiff sent its demand to the board of directors in February 2011.  In September 2011, the Board advised that it would take no action.  The plaintiff filed its lawsuit in March 2012.  More than three years passed between October 2008, when the complete truth allegedly emerged, and March 2012, when the lawsuit was filed.  Nevertheless, the Business Court held that the statute of limitations was suspended during the period of the Board’s consideration of the plaintiff’s demand.  Thus the statute of limitations did not require dismissal of the lawsuit.

Failure to Plead Sufficiently any Breach of Fiduciary Duty

In Nevada, fraud or mistake must be pled with particularity.  And if claims of breach of the fiduciary duty are allegations of fraud committed by the respondent officers and directors, then the plaintiff must satisfy the heightened pleading requirement.  The Business Court held that “in this matter, Plaintiff’s claims for relief concern Defendants’ dissemination of false and misleading information.”  Therefore, the Business Court found that “the allegations concerning Defendant’s alleged breach of fiduciary duty duties to IGT are subject to the heightened pleading requirements under Rule 9(b).”

Unjust Enrichment

The Business Court also dismissed the plaintiff’s claim of unjust enrichment, stating: “Plaintiff’s Complaint fails to plead how certain compensation to Defendants was unjust and fails to identify the corresponding loss to IGT in support of the claim for unjust enrichment.”

Leave to Amend

Even though the shareholder derivative lawsuit was insufficient, the Business Court stated that the preferred course of action was to grant the plaintiff leave to amend the complaint to comply with the applicable pleading requirements.

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