## Facts

- Comverse Technology, Inc. faced public reports and government scrutiny concerning allegedly backdated stock option grants that could create improper executive gains and require financial restatements.
- The board formed a special committee of two outside directors to investigate the company’s option-granting practices and take corrective steps; one committee member also served on the compensation committee implicated in the challenged grants.
- Before the special committee completed its investigation, shareholders filed a New York shareholder derivative action against various officers and directors.
- The complaint alleged that certain directors and executives orchestrated or benefited from backdating and that compensation committee members knowingly or recklessly approved obviously misstated grant dates.
- Plaintiffs did not make a pre-suit demand on the board, alleging demand would be futile because a majority of directors faced a substantial likelihood of liability and could not impartially decide whether to sue.
- After the suit began, authorities brought civil and criminal actions against some executives, and the company took steps to separate from those individuals.

## Issues

1. Whether the shareholders adequately pleaded demand futility under N.Y. Bus. Corp. Law § 626(c) and CPLR pleading standards.
2. Whether the board’s formation of a special committee to investigate alleged wrongdoing, before suit was filed, established as a matter of law that demand was not futile.
3. Whether demand futility must be assessed as of the filing of the complaint rather than based on subsequent events.

## Decision

- The Appellate Division, First Department reversed the dismissal of the derivative complaint and reinstated the action for further proceedings.
- The court held plaintiffs pleaded demand futility with sufficient particularity at the motion-to-dismiss stage.
- The existence and early activity of the special committee did not automatically negate demand futility or substitute for the required analysis of director interest and independence.
- Subsequent remedial actions and later developments could not retroactively defeat demand futility if futility existed when the complaint was filed.

## Legal Principles

- In a derivative action commenced without a pre-suit demand, plaintiffs must plead with particularity facts showing demand would be futile, including that a majority of the board is interested/lacks independence or that the challenged conduct was not a valid exercise of business judgment.
- Demand futility is evaluated as of the time the derivative complaint is filed; later board or committee actions do not cure a deficient demand posture or defeat properly pleaded futility.
- Formation of an investigative special committee is relevant but not dispositive; it does not create a categorical bar to demand futility and does not, by itself, establish the board’s ability to consider demand impartially.
- Allegations that directors participated in, approved, or consciously ignored illegal conduct or serious accounting-related misconduct may support an inference of a substantial likelihood of liability sufficient to excuse demand at the pleading stage.

## Conclusion

The court reinstated the derivative action, holding that demand futility is assessed at the time of filing and that a board’s creation of a special committee to investigate suspected options backdating does not, without more, establish that a demand would have been effective or required.


Matter of Comverse Tech., Inc. Derivative Litig., 56 A.D.3d 49 (N.Y. App. Div. 1st Dep’t 2008)