Order Submitted Matter

Cal. Super. - 6th Dist.January 27, 2021

KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO SUPERIOR COURT OF CALIFORNIA COUNTY OF SANTA CLARA JASON FORRESTER, Case N0.: 21CV376632 Plaintiff, ORDER CONCERNING: A) DEFENDANTS’ DEMURRER TO VS. PLAINTIFF’S COMPLAINT; AND B) MOTION TO REQUIRE PLAINTIFF LIGHTSPEED VENTURE PARTNERS, et a1., TO FURNISH A BOND PURSUANT TO CALIFORNIA CORPORATIONS Defendants. CODE § 800(c) Plaintiff Jason Forrester brings this action derivatively 0n behalf 0f nominal defendant SnapRoute, Inc. and in his individual capacity. He alleges that Defendants Lightspeed Venture Partners, Norwest Venture Partners, Joe Sexton, John Vrionis, and Rama Sehkar engaged in a fraudulent scheme t0 remove him as founding CEO 0f SnapRoute, and otherwise harmed the company and Mr. Forrester. Defendants now file this demurrer, arguing that Plaintiff fails t0 allege either demand refusal 0r demand futility as required t0 support the derivative claims, and otherwise fails t0 state a cause 0f action. (Code CiV. Proc., § 430.10, subd. (6).) Defendants also move t0 require Plaintiff to furnish a $50,000 bond pursuant t0 Corporations Code section 800, subdivision (c).1 1 A11 future statutory references are t0 the Corporations Code unless otherwise stated. ORDER ON SUBMITTED MATTERS Electronically Filed by Superior Court of CA, County of Santa Clara, on 8/10/2021 1:06 PM Reviewed By: R. Walker Case #21CV376632 Envelope: 7031522 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Plaintiff opposes both motions. The Court issued a tentative ruling 0n August 4, 2021 and held oral argument 0n August 5. The Court now issues its final order, which: a) SUSTAINS the demurrer t0 the first through fourth, sixth, and seventh causes 0f action with 30 days’ leave t0 amend; and b) OVERRULES the demurrer as t0 the fifth cause 0f action. The Court also DENIES Defendants’ motion to require Plaintiff t0 furnish a bond. I. BACKGROUND As alleged in the Complaint, Mr. Forrester is the founder and former CEO 0f SnapRoute, a networking technology startup. (Complaint,W 1-3.) Defendants Lightspeed Venture Partners (Lightspeed 0r LSVP) and Norwest Venture Partners (Norwest 0r NVP) are two venture capital firms that worked with SnapRoute. (Id,W 4-5.) Defendant Joe Sexton is an Entrepreneur in Residence and advisor t0 various venture capital firms. (Id, 1] 6.) Defendant John Vrionis is a former partner at Lightspeed who also serves 0n SnapRoute’s board, and was the first venture capitalist t0 formally invest in SnapRoute. (161., 1] 7.) Finally, Defendant Rama Sehkar is a junior partner at Norwest. (Id., 1] 8.) In early 20 1 5, after working for IBM and then Apple for many years, Mr. Forrester started working 0n a networking startup company using technology he had independently developed/invented. (Complaint, 1] 17.) He hired the law firm Fenwick & West in mid-April 2015 t0 help form the company, which was ultimately called SnapRoute. (Ibid) At the same time, Mr. Forrester was discussing potential investment in his startup with Lightspeed. (Ibid) An agreement was reached 0n terms for funding 0n May 19, 2015, and SnapRoute was incorporated in Delaware 0n May 20, 2015. (Ibid) (It was registered with the California Secretary 0f State 0n May 22, 2015.) (Ibid) Mr. Forrester was elected CEO, President, CFO, and Secretary 0f SnapRoute and was issued 15 million shares 0f common stock 0n a four-year monthly “double trigger” vesting schedule. (1d,, 1] 19.) For the next two years, Mr. Forrester worked tirelessly for SnapRoute in developing its technology, soliciting and obtaining millions of dollars in investment funds, and running the company administratively. (Complaint, 1] 20.) But the board (at that time, Mr. Sehkar, Mr. KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Sexton, and Mr. Vrionis) repeatedly overruled his decisions about what markets t0 take the product t0, resulting in wasted investments and harm t0 the company’s reputation. (1d,, 1] 22.) The board also forbade NEA, a tier one prestigious investor, from investing in SnapRoute, with Mr. Vrionis stating that a junior partner from Norwest could be better controlled. (Id, 1] 23.) In addition, the board hired an unqualified Vice President 0f Engineering with ties t0 the venture capitalists against Mr. Forrester’s advice; the Vice-President ultimately was terminated for non- performance. (1d,, 1] 24.) Moreover, the board wasted money by using a recruiting firm, unreasonably declined t0 continue work with Linkedln, and fired essential personnel who were believed t0 be “Forrester loyalists.” (161., W 26-28.) Board members put personal dislikes and grudges against peer venture capitalists before SnapRoute’s best interests, angrily dismissing potential investors, insulting an early investor, and dismissing another potential advisor. (Id., W 30-32.) And the board did not disclose that Mr. Sexton, the “independent” board member, had a previous relationship with the other board members, making him effectively an agent 0f the venture capitalists. (Id, 1] 33.) The board engaged in a fraudulent scheme t0 remove Mr. Forrester from his position and unilaterally took his shares, which Mr. Forrester believes is a pattern their firms have engaged in with other founding teams. (Complaint, 1] 29.) They brought in an interim CEO with an undisclosed prior relationship t0 the venture capitalists, who had a reputation for liquidating and n0 relevant industry experience. (1d,, 1] 35.) The board made false statements about Mr. Forrester t0 competitors, customers, and prospective investors, including about an “investigation” into Mr. Forrester that was based almost entirely 0n unsubstantiated hearsay and rumor. (161., 1] 36.) Following a purported investigation by Fenwick & West in 2017, the board informed Mr. Forrester that he was being terminated due t0 misconduct and embezzlement. (Id, W 76-79.) He went t0 court against SnapRoute, which decided t0 settle with him by agreeing t0 return his shares, but the company was sold t0 Infoblox for $1 million a month later, in November 2019. (161., 1] 80.) Then, Mr. Forrester’s eX-wife accused him 0f breach 0f fiduciary KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO duty based 0n the supposed embezzlement, attempting t0 get more money than she is entitled t0 in their divorce. (Id, 1] 8 1 .) Ultimately, the board directed SnapRoute not t0 pay numerous suppliers, terminated all customer contracts, “pivoted” the main product, and sold the company’s technology for $1 million without notifying its largest common shareholder. (Complaint,w 37-4 1 .) Based 0n these allegations, Mr. Forrester asserts the following causes 0f action against Defendants: (1) a derivative claim for breach 0f fiduciary duty, (2) a derivative claims for abuse 0f control, (3) a derivative claim for waste, (4) a derivative claim for breach 0f the covenant 0f good faith and fair dealing, arising from SnapRoute’s Series Seed Preferred Stock Purchase Agreement, (5) an individual claim for tortious interference with Mr. Forrester’s Restricted Stock Purchase Agreement, (6) an individual claim for fraud, and (7) an individual claim for equitable indemnity concerning Mr. Forrester’s liability in his divorce proceedings. Mr. Forrester presented SnapRoute with the Complaint 0n November 10, 2020, but the board never responded. Based 0n the board’s non-response, Plaintiff contends that the board has declined t0 resolve the derivative claims in this action. (Id,W 14-15.) II. REQUEST FOR JUDICIAL NOTICE In support 0f both their motions, Defendants request judicial notice 0f SnapRoute’s Restated Certificate 0f Incorporation (EX. A t0 their request) and the Restricted Stock Purchase Agreement between Plaintiff and SnapRoute (EX. B). Defendants request is unopposed, and the Court GRANTS it. (EVid. Code, § 452, subds. (C) & (h); Ingram v. Flippo (1999) 74 Cal.App.4th 1280, 1285, fn. 3 [taking judicial notice 0f documents that “form the basis 0f the allegations in the complaint”].) III. DEMURRER A. Legal Standard A demurrer tests the legal sufficiency 0f the complaint. (Chen v. PayPal, Inc. (2021) 61 Cal.App.5th 559, 568.) Consequently, it “reaches only t0 the contents 0f the pleading and such matters as may be considered under the doctrine ofjudicial notice.” (Weil v. Barthel (1955) 45 Cal.2d 835, 837; see also Code CiV. Proc., § 430.30, subd. (a).) “It is not the ordinary function KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO 0f a demurrer t0 test the truth 0f the plaintiff” s allegations 0r the accuracy with which he describes the defendant’s conduct. [T]he facts alleged in the pleading are deemed t0 be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.) In ruling on a demurrer, the Court must liberally construe the allegations 0f the complaint, with a View t0 substantial justice between the parties. (Glennen v. Allergan, Inc. (2016) 247 Cal.App.4th 1, 6.) Nevertheless, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions 0r conclusions 0f law 0r fact.” (George v. Automobile Club ofSouthern California (201 1) 201 Cal.App.4th 1112, 1120.) A demurrer will succeed where the allegations and matters subject t0 judicial notice clearly disclose a defense 0r bar t0 recovery. (Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183.) B. Derivative Claims Defendants demur t0 the derivative claims 0n the grounds that Plaintiff fails t0 allege demand refusal 0r demand futility as a threshold matter, and otherwise fails t0 state any derivative claim under Delaware law. In opposition, Plaintiff contends that California law applies t0 his claims per section 21 15 0f the Corporations Code; he has alleged 0r could allege demand refusal; demand is excused; and each 0f his claims states a cause 0f action 0r could be amended t0 d0 so. 1. Applicable Law The parties agree that, as alleged in the Complaint, SnapRoute is incorporated in Delaware. Defendants correctly urge that this typically means derivative claims 0n behalf 0f the company are subject t0 Delaware law, as t0 both the standard 0f care governing fiduciary duties and the requirements for bringing a derivative suit like demand futility 0r refusal. (See Kamen v. Kemper Fin. Services (1991) 500 U.S. 90, 108-109 [scope 0f demand requirement is established by the law 0f the state 0f incorporation]; Villari v. Mozilo (2012) 208 Cal.App.4th 1470, 1479, fn. 9 [Delaware substantive law applied in a shareholder derivative case “pursuant t0 the internal affairs doctrine, codified at Corporations Code section 21 16, which provides that the law 0f the place 0f incorporation governs the liability 0f directors t0 the corporation and its shareholders”]; KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Vaughn v. LJInternat., Inc. (2009) 174 Cal.App.4th 213, 223-224 [law 0f the state 0f incorporation normally governs both the standard 0f care and permission t0 sue provisions].) But Plaintiff contends that California law applies here under section 21 15, which provides that specific provisions 0f the Corporations Code apply t0 foreign corporations if certain requirements are satisfied. Yet the Complaint does not allege that section 21 15 applies, nor does it allege facts supporting the application 0f section 21 15 in this case. Hence, for purposes 0f this demurrer, the Court will apply Delaware law. But the Court will grant Plaintiff leave t0 amend the Complaint t0 allege that California law applies t0 particular claims because 0f section 21 15, if he wishes, and t0 allege the factual requirements required for section 21 15 . 2. Demand Requirement Under Delaware law, “the business and affairs 0f a corporation, absent exceptional circumstances, are t0 be managed by its board 0f directors.” (In re Tyson Foods, Inc. (Del. Ch. 2007) 919 A.2d 563, 581 .) That means derivative claims are “owned” by the corporation rather than individual shareholders, since such claims are being brought 0n behalf 0f the corporation and, if successful, will benefit the corporation. Therefore, the board generally should have the first chance t0 decide t0 file such derivative claims. Only after it refuses t0 file these claims (0r after it has been shown that the board cannot lawfully decide the question, and thus that a demand would be “futile”) can a shareholder try t0 pursue derivative claims. Rule 23.1 0f the Chancery Court Rules hence “requires that the complaint [in a derivative action] ‘allege with particularity the efforts, if any, made by the plaintiff t0 obtain the action the plaintiff desires from the directors and the reasons for the plaintiff’s failure t0 obtain the action 0r for not making the effort.’ ” (Ibid) Where a plaintiff asserts that demand would be futile, he 0r she must support that claim with allegations that “comply with stringent requirements 0f factual particularity.” (Ibid) Here, the Complaint does not allege that demand 0n SnapRoute’s board would be futile. Nor does the Complaint make specific factual allegations about demand futility. Rather, Plaintiff alleges that the Complaint “was presented t0 SnapRoute 0n November 10, 2020 in its final form KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO by way 0f a certified letter t0 its address that is 0n file with the Secretary 0f State,” and “Founder waited a reasonable period 0f time (21 days) from the date 0f mailing for a response from SnapRoute’s board. There was n0 response. Accordingly, the board has declined t0 resolve the derivative claims in this matter according t0 law, and Founder therefore pursues the claims in the name 0f SnapRoute, Inc.” (Complaint,W 14-15.) A demand “must provide “ ‘(i) the identity 0f the alleged wrongdoers, (ii) the wrongdoing they allegedly perpetrated and the resultant injury t0 the corporation, and (iii) the legal action the shareholder wants the board t0 take 0n the corporation’s behalf.’ “ (Solak v. Welch (Del. Ch. Oct. 30, 2019, N0. 2018-0810-KSJM) 2019 Del. Ch. LEXIS 1338, at *9, quoting Yaw v. Talley (Del. Ch. Mar. 2, 1994, Civil Action N0. 12882) 1994 Del. Ch. LEXIS 35, at *22-23 (Yaw).)2 Here, Plaintiff has not alleged that he requested that the entire board take specific action 0n SnapRoute’s behalf t0 address specific harm caused by specific wrongdoing by specific wrongdoers. The mere sending 0f a proposed complaint t0 the board, “without more, will not necessarily constitute a demand because it might not identify the specific remedial corporate action that the shareholder wants the board t0 take.” (Yaw, supra, 1994 Del. Ch. LEXIS 35, at *21.) Accordingly, the Court finds Plaintiff did not allege a valid “demand” under Delaware law. In addition, a “shareholder must allow the board a reasonable time t0 investigate and respond t0 the claim before filing suit 0r the court will consider that suit premature.” (Charal Inv. C0. v. Rockefeller (Del. Ch. NOV. 7, 1995, Civil Action N0. 14397) 1995 Del. Ch. LEXIS 132, at *7-8.) Plaintiff’s allegation that he waited 21 days for a response from SnapRoute’s board likely does not suffice. The Court will accordingly sustain Defendants’ demurrer t0 the derivative claims with leave t0 amend for failure t0 allege either demand futility 0r demand refusal. It will be Plaintiff’s choice what theory 0r theories t0 pursue if he amends his complaint. But if he chooses t0 allege 2 “Unpublished opinions 0f Delaware courts may be cited in Delaware, although not as binding precedent.” (VICIRacing, LLC v. T-Mobz'le USA, Inc. (3d Cir. 2014) 763 F.3d 273, 287, fn. 9.) KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO demand futility, he should be prepared t0 explain why this is permissible under the governing state’s law considering his current demand refusal allegations, and t0 provide supporting authority. 3. Conclusion As explained above, the Court SUSTAINS Defendants’ demurrer t0 the derivative claims (the first through fourth causes 0f action) with leave t0 amend, for failure t0 allege either demand refusal 0r demand futility. Given this ruling, the Court need not address whether the derivative allegations are otherwise sufficient t0 state a claim. C. Individual Claims There appears t0 be n0 dispute that California law applies t0 Plaintiff’s individual claims. Defendants contend that Plaintiff fails t0 state a cause 0f action as t0 any 0f these claims. 1. The Fifth Cause OfActionfor Tortious Interference The elements of a claim for intentional interference with contractual relations are “(1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge 0f this contract; (3) defendant’s intentional acts designed t0 induce a breach 0r disruption 0f the contractual relationship; (4) actual breach 0r disruption 0f the contractual relationship; and (5) resulting damage.” (Pacific Gas & Electric C0. v. Bear Steams & C0. (1990) 50 Cal.3d 1118, 1126 (PG&E).) In the Complaint, Mr. Forrester alleges that there was a contract between himself and SnapRoute in the form 0f his Restricted Stock Purchase Agreement (RSPA), “which spelled out that Founder would be entitled t0 shares upon continued performance in his job.” (Complaint, 1] 68.) Defendants knew 0f the contract, and they disrupted it by “arrang[ing] t0 prepare a dossier 0n Founder in order t0 fabricate a basis 0n which t0 justify his firing, and therefore the return 0f his shares,” which harmed Mr. Forrester. (Id., W 69-73.) Defendants contend that these allegations fail t0 state a claim because nothing in the RSPA guarantees ongoing employment t0 Mr. Forrester. But this is not required t0 state a claim for tortious interference. (See PG&E, supra, 50 Cal.3d at p. 1129 [“while the tort 0f inducing breach 0f contract requires proof 0f a breach, the cause 0f action for interference with contractual KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO relations is distinct and requires only proof 0f interference”].) Defendants further argue that the Complaint does not specifically explain how Plaintiffs termination 0r the preparation of a “dossier” prevented his performance, and Plaintiff fails t0 allege damage because he does not state that he did not receive the shares t0 which he was entitled. But this level 0f specificity is not required. It is clear enough from the Complaint as a whole that Plaintiff contends Defendants falsely accused him 0f misconduct related t0 his job, which disrupted his contractual relationship with his employer, SnapRoute, and damaged him as a result 0f his termination. Defendants argued at the August 5 hearing that the board members were acting 0n behalf 0f SnapRoute and within the scope 0f their authority when they terminated Plaintiff” s contract, and thus they were not true “third parties” t0 the contract between Plaintiff and SnapRoute. First 0f all, Defendants did not raise this argument in their demurrer. Second, even if it is correct (and the Court takes n0 position 0n that claim), some 0f the named Defendants are not SnapRoute board members. Specifically, Lightspeed Venture Partners and Norwest Venture Partners are Defendants who are true third parties. The Court OVERRULES Defendant’s demurrer 0n this basis. 2. The Sixth Cause ofActionfor Fraud The elements 0f a claim for fraud are “(1) a misrepresentation, (2) with knowledge 0f its falsity, (3) with the intent t0 induce another’s reliance 0n the misrepresentation, (4) actual and justifiable reliance, and (5) resulting damage.” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1166 (Daniels); see also Lazar v. Superior Court (1996) 12 Cal.4th 63 1, 638 (Lazar) [reciting the same elements].) “For policy reasons, ... fraud ...must be pleaded with particularity-that is, the pleading must set forth how, when, where, t0 whom, and by what means the representations were made.” (Foster v. Sexton (2021) 61 Cal.App.5th 998, 1028.) “The specificity requirement serves two purposes: ‘to apprise the defendant 0f the specific grounds for the charge and enable the court t0 determine whether there is any basis for the cause 0f action.’ ” (Orcilla v. Big Sur, Inc. (2016) 244 Cal.App.4th 982, 1008, quoting Chapman v. Skype Inc. (2013) 220 Cal.App.4th 217, 231.) Here, Mr. Forrester alleges that KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO [i]n July 2017, the other board members asked Founder t0 step down as CEO, claiming it would be best for the company t0 get someone who had more experience running a startup company. Founder believed them, and he did not think at that time that they were asking with any malicious intent. So he abided by their request and stepped down as CEO. Upon stepping down from the company as the CEO, he now only had one board seat. Now the other investors 0n the board had the power t0 vote him out, due t0 the fact he was n0 longer the CEO and n0 longer held two 0f the board seats; that is exactly what they did, but under false pretenses. (Complaint, 1] 76.) “The foregoing course 0f conduct establishes that the Defendants tricked Founder into stepping down as CEO in order t0 fire him.” (Id., 1] 82.) As urged by Defendants, these allegations fail t0 specify how, where, t0 whom, and by what means the representation at issue was made. Nor d0 the allegations specify which Defendants made which specific representations. This does not suffice t0 allege fraud. (See Lazar, supra, 12 Cal.4th at p. 645 [“general and conclusory allegations d0 not suffice”]; see also 5 Witkin Cal. Proc. (5th ed. 2020) Pleading §§ 71 8 [“[t]he representation must be directly and specifically pleaded; without that pleading an essential element 0f the cause 0f action is 1acking”], 719 [“[t]he typical misrepresentation 0f fact is usually pleaded verbatim”].) For example, where a plaintiff alleges fraud by a corporation, “the plaintiff must ‘allege the names 0f the persons who made the allegedly fraudulent representations, their authority t0 speak, t0 whom 3” they spoke, what they said 0r wrote, and when it was said 0r written. (Lazar, supra, 12 Cal.4th at p. 645, quoting Tarmann v. State Farm Mut. Auto. Ins. C0. (1991) 2 Cal.App.4th 153, 157.) Plaintiff does not plead these details here. In opposition t0 Defendants’ motion, he merely makes general reference t0 the three pages 0f allegations supporting his fraud claim and concludes, “[t]0 the extent necessary t0 establish each Defendant’s liability for fraud, the complaint can be amended t0 spell out who said what, when, and under what circumstances.” Defendants also contend that Plaintiff fails t0 allege that his decision t0 step down caused the board t0 be able t0 terminate him, since the other board members always held a majority 0f 10 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO the seats (three 0f the five) even before Plaintiff stepped down. Plaintiff” s own declaration submitted in opposition t0 Defendants’ motion for a bond confirms this. Plaintiff should address this problem in connection with any amended fraud claim that he asserts in a future pleading. In light of Plaintiff” s failure to allege his fraud claim with specificity and t0 allege that the asserted fraud caused the harm he claims, the Court SUSTAINS the demurrer t0 the sixth cause 0f action with leave t0 amend. 3. The Seventh Cause ofActionfor Equitable Indemnity In the seventh cause 0f action, Plaintiff alleges that “Defendants caused Founder t0 incur liability in the matter ofIn re Marriage ofForrester, in that Defendants, not Founder, are responsible for the decline in value 0f SnapRoute as a going concern from 2017 t0 2019.” (Complaint, 1] 85.) So “Founder prays for a decree 0f equitable indemnity setting Defendants’s liability t0 Founder according t0 the amount Founder is required t0 pay in the underlying divorce proceeding,” (id, 1] 86), “t0 the extent attributable t0 the bad conduct 0f Defendants” (id, Prayer, ‘H 6)- Defendants correctly urge that equitable indemnity “applies only among defendants who are jointly and severally liable t0 the plaintiff” and is generally “based 0n a duty owed t0 the underlying plaintif .” (BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848, 852.) Here, the underlying “plaintiff” is Mr. Forrester’s eX-wife, whom he alleges “is accusing him 0f breach 0f fiduciary duty 0n the basis 0f what SnapRoute claimed -- that Founder was supposedly embezzling, which is not true.” (Complaint, 1] 81.) Clearly, there is n0 basis t0 find that Defendants owe fiduciary duties t0 Plaintiff” s eX-wife, and it is not apparent that there is any other basis t0 require Defendants to indemnify Plaintiff for liability incurred in his divorce proceedings. Perhaps Plaintiff could provide such a basis in an amended complaint, but he has not done so here. D. Conclusion The Court SUSTAINS WITH 30 DAYS’ LEAVE TO AMEND Defendants’ demurrer as t0 the first through fourth, sixth, and seventh causes 0f action. The Court OVERRULES the demurrer as t0 the fifth cause 0f action. 11 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO IV. MOTION TO REQUIRE PLAINTIFF TO FURNISH A BOND Defendants move t0 require Plaintiff t0 furnish a bond pursuant t0 section 800, 0n the grounds that there is n0 reasonable possibility that the action will benefit SnapRoute, and Lightspeed and Norwest did not participate in the transactions at issue. Defendants seek a $50,000 bond, the statutory maximum. A. Legal Standard Section 800 authorizes a defendant t0 a derivative action t0 move for a bond “not t0 exceed fifty thousand dollars ($50,000), t0 be furnished by the plaintiff for reasonable expenses, including attorneys’ fees, which may be incurred by the moving party and the corporation in connection with the action, including expenses for which the corporation may become liable pursuant t0 Section 3 17 [concerning indemnification 0f corporate agents for legal expenses and liabilities].” (§ 800, subd. (d).) The motion shall be based 0n one 0r both 0f the following grounds: (1) That there is n0 reasonable possibility that the prosecution 0f the cause 0f action alleged in the complaint against the moving party will benefit the corporation 0r its shareholders. (2) That the moving party, if other than the corporation, did not participate in the transaction complained 0f in any capacity. (§ 800, subd. (0).) The defendant must “ ‘establish[] a probability,’ based 0n affidavits 0r oral testimony,” that one 0f these two grounds exists. (Donner Management C0. v. Schafler (2006) 142 Cal.App.4th 1296, 1303 (Donner), quoting § 800, subd. (d) [“[a]t the hearing upon any motion pursuant t0 subdivision (c), the court shall consider such evidence, written 0r oral, by witnesses 0r affidavit, as may be material” t0 these issues].) “In assessing whether there is n0 reasonable possibility the action will benefit the corporation, the court ‘must evaluate the possible defenses 12 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO which the plaintiffs would have t0 overcome before they could prevail at trial.’ (2 Ballantine & Sterling, Cal. Corporation Laws (4th ed. 2005) § 293.02, p. 14-23.)” (Id. at pp. 1303-1304.) “The purpose 0f the section 800 security provision is t0 prevent unwarranted shareholder derivative lawsuits,” considering “that the cause 0f action and potential remedy belong t0 the corporation, not the shareholder [citation], and the corporation has chosen not t0 pursue the litigation.” (Donner, supra, 142 Cal.App.4th at p. 1305.) B. Discussion Defendants’ arguments supporting the first ground for their motion mirror the arguments presented in their demurrer: namely, that Plaintiff fails t0 allege facts showing he made a demand 0n the board that was refused 0r that demand would have been futile, and Plaintiff does not allege facts adequate t0 state a claim for breach 0f fiduciary duty against any 0f the Defendants. But the question governing the present motion is not whether the Complaint, in its current form, states a cause 0f action: it is whether there is a “reasonable possibility“ that prosecuting the derivative claims will benefit SnapRoute 0r its shareholders. While the first question might be relevant t0 the second one, it is not dispositive.4 Notably, Defendants offer n0 evidence in support 0f their motion, relying entirely on the asserted deficiencies in the Complaint. This is problematic. As an initial matter, section 800 and 3 Throughout their motion, Defendants indicate that Plaintiff must demonstrate a “reasonable probability” that the action will benefit SnapRoute, but that is not the standard. Rather, Defendants have the burden t0 “ ‘establish[] a probability,’ ” that there is n0 reasonable possibility that the action will benefit SnapRoute, 0r that they were not involved in the transaction at issue. (Donner, supra, 142 Cal.App.4th at p. 1303.) Defendants’ own authority confirms this. (See Burt v. Irvine C0. (1965) 237 Cal.App.2d 828, 868, fn. 5 (Burt) [“the test is whether ‘the moving party has established a probability in support 0f” the proposition ‘That there is n0 reasonable possibility that the prosecution . . . will benefit the corporation 0r its security holders. ’ [Citations.] ”] .) 4 On reply, Defendants argue that courts “have freely granted bond motions 0n grounds that a complaint did not state a claim.” But they cite only one case t0 support this argument, Burt. And Burt held that a bond was properly required where a demurrer had been sustained without leave t0 amend based 0n the statute 0f limitations as t0 certain defendants, reversing as t0 the remaining defendants. (See Burt, supra, 237 Cal.App.2d at pp. 867-870.) Here, the Court has sustained Defendants’ demurrer t0 the derivative claims with leave t0 amend. 13 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Donner suggest that a motion t0 require a bond should be supported by evidence. While the Court does not interpret these authorities t0 mean that evidence is always required, under the circumstances here, the Court cannot find that there is n0 “reasonable possibility” that Plaintiff could bring a successful derivative claim. T0 explain, although the Court found that Plaintiff has failed t0 allege he sent a proper demand t0 SnapRoute’s board by merely mailing the Complaint, Plaintiff” s counsel declares that he sent the proposed Complaint t0 SnapRoute with a cover “detailed demand letter” 0n November 10, 2020, and he also sent a “demand letter and draft complaint t0 the remaining Defendants in this matter, 0n 0r about December 22, 2020.” While counsel attaches only the letter t0 Lightspeed and the letter t0 SnapRoute appears t0 have been lost, it remains unclear that Plaintiff cannot allege a proper demand 0n SnapRoute’s board. Since Defendants provide n0 evidence about whether they received a demand letter 0r how they responded t0 such a letter, they have not established that there is n0 reasonable possibility that Plaintiff could establish standing based 0n demand refusal. Defendants alternatively argue that Plaintiff did not make a proper demand, an argument with which the Court has agreed above. While they urge that Plaintiff is now barred from alleging demand futility, the authorities they cite for this proposition d0 not address the situation where a proper demand was never made. (See Spiegel v. Buntrock (Del. 1990) 571 A.2d 767, 775 [“[b]y making a demand, a stockholder tacitly acknowledges the absence 0f facts t0 support a finding of futility”; “[a] shareholder who makes a demand can n0 longer argue that demand is excused”].) Therefore, Plaintiff may still be able t0 allege demand futility in the future. Defendants present n0 evidence 0n the merits 0f this issue, either. As t0 the merits 0f the fiduciary duty claims, Defendants similarly argue that the Complaint does not currently state a claim, but d0 not address whether it might be amended t0 d0 so. They urge that Plaintiff” s arguments and allegations about bad faith and conflicts 0f interest are “speculative,” but present n0 evidence that would allow the Court t0 find there is n0 “reasonable possibility” they are true. And Plaintiff submits a declaration providing some support for these theories. 14 KOOONONUl-hwwu-t NNNNNNNNNHHHHHHHHHH OONONM-PWNHOKOOONONm-PWNHO Similarly, Defendants argue that Norwest and Lightspeed were not involved in the challenged transactions and did not owe fiduciary duties t0 SnapRoute’s shareholders, but they present n0 evidence addressing the relationship between these defendants and the board. They argue that “[u]nder Delaware law, a shareholder owes n0 fiduciary duties unless it owns a ‘maj ority interest in 0r exercises control over the business affairs 0f the corporation.’ Kahn v. Lynch Commc ’ns Sys., Ina, 638 A.2d 1110, 1113 (Del. 1994) (quotations omitted) (emphasis in 0riginal).” But they d0 not address whether there is a reasonable possibility that such circumstances are present here, again relying only 0n Plaintiff’s failure “t0 plead specific facts demonstrating actual exercise 0f control” in the current Complaint. Defendants thus fail t0 meet their burden t0 show that a bond should be required. C. Conclusion The Court DENIES Defendants’ motion t0 require Plaintiff t0 furnish a bond. IT IS SO ORDERED. Date: The Honorable Sunil R. Kulkarni Judge 0f the Superior Court 15 August 10, 2021