In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs.
Annotation The purpose underlying the requirements of this rule is to avoid the possibility of a multiplicity of lawsuits against corporations by individual stockholders or small groups of stockholders. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). This rule avoids multiple suits by condominium unit owners against the condominium association or against the wrongdoers. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975). Courts have generally been careful to regard the derivative suit as an extraordinary remedy, which is available to the shareholder, as the corporation's representative, only when there is no other road to redress. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). The purpose of a derivative action is to recover sums owed the corporation. O'Malley v. Casey, 42 Colo. App. 85, 589 P.2d 1388 (1979). The fact that a shareholder is a judgment creditor of the corporation does not automatically render such shareholder ineligible to maintain a derivative action. New Crawford Valley, Ltd. v. Benedict, 847 P.2d 642 (Colo. App. 1993). The requirements of this rule are mandatory. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). This rule encourages corporation rather than shareholders to sue. The purpose of this rule is to encourage the corporation itself, rather than the shareholders in its behalf, to sue for redress of corporate claims. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975). Stockholder may maintain a personal action only if actions of third party that injure corporation result from a violation of a duty owed to him as a stockholder and cause injury unique to himself and not suffered by other stockholders. Security Nat'l Bank v. Peters, Writer, & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977); Nicholson v. Ash, 800 P.2d 1352 (Colo. App. 1990); Kim v. Grover C. Coors Trust, 179 P.3d 86 (Colo. App. 2007). This rule does not preclude derivative suit by corporation with only one minority stockholder. Clemons v. Wallace, 42 Colo. App. 17, 592 P.2d 14 (1978). Compliance must be shown on face of complaint. In order to pursue a shareholder's derivative action, compliance must be shown on the face of the complaint. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). Where it is obvious from the face of the complaint that the requisite demand upon shareholders was not made and no explanation for the lack of demand is offered, an action by the stockholder will not lie. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). Redress must first be sought from the directors. Courts will not interfere with the internal affairs and management of a corporation on the complaint of an individual stockholder or a small group of stockholders, unless it appears from the allegations of the complaint that all efforts to obtain redress from the directors have been exhausted or would have been futile. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). Redress must then be sought from stockholders. When a stockholder or group of stockholders has exhausted all efforts to obtain redress from the directors, or where such efforts would have been futile, the stockholder must then make demand upon and seek relief from the stockholders of the corporation. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). Record was insufficient to allow the trial court to conclude as a matter of law that plaintiffs were required to make a demand upon over 8,000 shareholders before they filed their complaint. New Crawford Valley, Ltd. v. Benedict, 847 P.2d 642 (Colo. App. 1993). Demands for desired action need not be made by shareholder plaintiffs upon directors allegedly involved as wrongdoers. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971); Hirsch v. Jones Intercable, Inc., 984 P.2d 629 (Colo. 1999). A demand need be made only upon the directors who are in office at the time suit is commenced. A substantial change in membership of the board after suit is filed does not give rise to a requirement that a new demand for action be made. A contrary result would be overly burdensome to plaintiffs. New Crawford Valley, Ltd. v. Benedict, 847 P.2d 642 (Colo. App. 1993). Where it is demonstrated that making demand on shareholders in connection with nonratifiable wrongs of directors would involve unreasonable expense and effort, there is considerable authority that this would outweigh the merits of making the demand and that the demand therefore should be excused under such circumstances. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). Demand upon shareholders is excused when the allegations in plaintiff's complaint are of such a nature and are stated with sufficient particularity as to indicate that such demand would be futile. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). Where directors and controlling shareholders are antagonistic, a demand upon them is presumptively futile and no demand need be made. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). Where the number of shareholders is not pled as an excuse, nor is it accompanied by any allegation regarding unreasonable costs of making the demand, a court will not determine whether thousands of shareholders do, or do not, formulate a valid basis for an excuse in making demand on them. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). That the shareholders could not ratify the alleged wrongs because of the illegal nature of the wrongs is not an acceptable reason or a valid excuse for not making a demand on the shareholders. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). The purpose of making demand on the shareholders is to inform them of the alleged nonratifiable wrongs, to seek their participation in available courses of action such as the removal of the involved directors and the election of new directors who will seek the redress required in the circumstances, or to secure shareholder approval of an action for damages to the corporation caused by the alleged wrongdoing directors. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). Where plaintiffs allege that the defendant directors frustrated their attempt to secure a shareholders list by unreasonable restrictions, this is not a valid excuse for not making demand on the stockholders. Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). A shareholder or member must make demand on all claims or suit barred. A corporate shareholder or member cannot, consistent with the requirements of this rule, make a demand upon the corporation as to certain claims, and then attempt to sue derivatively on other claims. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975). Summary judgment for failure of complaint to allege demand is error. Where the fact of the futility of a shareholder demand is placed in issue by the depositions and exhibits in the court file, it is error to grant summary judgment on the ground that plaintiff's complaint fails to allege the demand for shareholder relief required by this rule. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). A complaint that specifically alleges that a demand was made by one plaintiff on the board of directors to require the president of the corporation to pay sums which he received as a premium for stock sold and that such demand was refused is sufficient not only to plead the demand, but also to set forth the reasons why another plaintiff was excused from making a second demand for the same action. Allegations that the board of directors breached a duty of care owed to the corporation and its shareholders was sufficient to establish reason for plaintiff's failure to make further demands. Greenfield v. Hamilton Oil Corp., 760 P.2d 664 (Colo. App. 1988). Dismissal of complaint for lack of verification was error. While the original complaint, as filed, had not been verified, where a notarized verification of the complaint, which had been signed and verified by plaintiff on November 21, 1972, was filed with the court on May 16, 1975, and defendant had failed to raise the issue until some two and one-half years after the complaint was filed, defendant waived the defect. Hence, the trial court erred in dismissing plaintiff's complaint on the ground that the verification required by this rule was lacking. Van Schaack v. Phipps, 38 Colo. App. 140, 558 P.2d 581 (1976). Summary dismissal of complaint based on special litigation committee recommendations was error. There is no basis to dismiss a claim asserted by plaintiffs in a derivative action where the ultimate decision to seek dismissal of such action was not made by the special litigation committee, but was a decision adopted by those persons who, as defendants in the litigation, had a vital personal interest in that decision. Greenfield v. Hamilton Oil Corp., 760 P.2d 664 (Colo. App. 1988). Private settlements prevented. The provision that " t he action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs" was intended to prevent private settlements between a plaintiff shareholder and the defendants. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975). An out-of-court settlement by a corporation involved in a derivative suit is not prevented. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975). The standard for the evaluation by trial courts of settlements in derivative suits under this rule is whether the agreement is fair, adequate, and reasonable. The standard is the same as the standard for settlements of class action suits under C.R.C.P. 23 because the court is charged with guarding the interests of those who are not parties to the agreement. Thomas v. Rahmani-Azar, 217 P.3d 945 (Colo. App. 2009). And the standard of review of a trial court's decision to approve a settlement is for an abuse of discretion, as it is with appellate review of class action settlements. Thomas v. Rahmani-Azar, 217 P.3d 945 (Colo. App. 2009). Particularity required by rule lacking. The general allegation that the plaintiffs "have diligently endeavored, over several years past, to have the Board of Managers of the defendant Association and the Association membership as a whole prosecute and resolve the claims involved in this action, but said efforts have been unavailing", completely lacks the particularity required by this rule. Ireland v. Wynkoop, 36 Colo. App. 205, 539 P.2d 1349 (1975). The mere fact that plaintiffs were represented by the same counsel as other plaintiffs was not sufficient to establish that they were "fronts" for a conflicting interest. New Crawford Valley, Ltd. v. Benedict, 847 P.2d 642 (Colo. App. 1993). For factors to be considered in a derivative action brought by a limited partner, see Moore v. 1600 Downing St., Ltd., 668 P.2d 16 (Colo. App. 1983). Applied in Neusteter v. District Court, 675 P.2d 1 (Colo. 1984); Collie v. Becknell, 762 P.2d 727 (Colo. App. 1988).
For actions by shareholders, see § 7-107-402 , C.R.S.