## Facts

- An Activision Blizzard, Inc. shareholder brought a derivative action on the corporation’s behalf against the CEO and current or former directors.
- The suit followed government investigations and enforcement activity concerning alleged workplace misconduct and discrimination at the company.
- The complaint alleged the directors knew of pervasive misconduct, ignored warning signs connected to investigations, and failed to oversee compliance and reporting.
- The company had an internal compliance and oversight system; the dispute concerned whether directors consciously failed to monitor it and respond to warning signs.
- The plaintiff did not make a pre-suit demand on the board and instead claimed demand was excused as futile.

## Issues

1. Whether the shareholder pleaded demand futility with particularized facts showing a majority of the board could not impartially consider a litigation demand.
2. Whether the allegations stated an oversight-liability theory sufficient to show directors faced a substantial likelihood of personal liability, excusing demand.

## Decision

- The court granted the defendants’ motion to dismiss.
- The court dismissed the derivative action for failure to make a pre-suit demand and for failure to plead demand futility.
- The court concluded the allegations did not show directors faced a substantial likelihood of liability on an oversight theory, given the existence of compliance/oversight mechanisms and the absence of sufficiently particularized “red flag” and bad-faith inaction allegations.

## Legal Principles

- In a shareholder derivative action, a plaintiff must either make a pre-suit demand on the board or plead demand futility under the law of the state of incorporation.
- Demand futility generally requires particularized allegations showing a majority of directors are disqualified from considering demand (including because they face a substantial likelihood of personal liability).
- Oversight-liability claims are not established by negligence or poor management; where a company has compliance systems, liability typically requires well-pleaded facts of conscious disregard or bad faith in the face of specific warning signs.

## Conclusion

The court dismissed the shareholder’s derivative suit because the complaint did not plead, with the required specificity, that a majority of directors faced a substantial likelihood of oversight liability or were otherwise unable to consider a pre-suit demand, so demand was not excused as futile.


Kahnert v. Kotick, No. 2:21-cv-08968-PA (C.D. Cal. Jan. 17, 2023)