Opinion by Judge GOULD; Dissent by Judge IKUTA.
GOULD, Circuit Judge:
In this shareholder’s derivative action, Plaintiff-Appellant Katherine Potter (“Potter”) alleges that the Defendants-Appel-lees (collectively, “Defendants”), who are managers and directors of Public Storage, Inc. (“PS”), wrongfully managed PS. The district court dismissed the action on the grounds that Potter failed to make an adequate demand on the Board of Directors of PS (“Board”) before filing her suit. We affirm.
[1054] I
PS is a California corporation that is publicly traded on the New York Stock Exchange. Potter and Co-Plaintiff Charles Krieger (“Krieger”) filed a derivative complaint against PS and sixteen individual defendants on December 30, 2004, alleging twelve causes of action including waste of corporate assets, breach of fiduciary duty, fraud, and violation of the Sar-banes-Oxley Act of 2002, 15 U.S.C. §§ 7201-7266. These allegations related to three alleged transactions: (1) PS’s acquisition of an entity known as PSIC (“PSIC transaction”); (2) the use of PS resources to provide services to a Canadian business owned by the Hughes family, who are prominent members of the Board (“Canadian transaction”); and (3) PS’s payment of management and advisory fees to entities owned by other defendants (“M & A transaction”). Upon Defendants’ motion to dismiss, the district court dismissed the complaint with leave to amend, concluding that Krieger and Potter did not satisfy the requirements of Rule 23.1 of the Federal Rules of Civil Procedure and California law.1
Potter and Krieger filed an amended complaint on July 12, 2005, alleging the same twelve causes of action but this time relating them to only two transactions, the PSIC transaction and the Canadian transaction. Defendants once again moved to dismiss, and the district court dismissed the second complaint, concluding that Krieger failed the contemporaneous ownership requirement and that Potter failed to make an adequate demand on the Board.
Krieger does not appeal Ms dismissal, so this appeal concerns only the adequacy of Potter’s demand on the Board. However, Krieger plays a major role in the facts leading to Potter’s appeal. Krieger sent a demand letter to the Board on November 21, 2002. This letter complained of the PSIC transaction but did not discuss the Canadian transaction. It also did not mention Potter by name, but noted that “[t]wo individuals ... who reside in Southern California where the lawsuit will be filed will join with me to bring the action.” Potter alleges that she was one of the two unnamed individuals to whom Krieger was referring in the letter.
On January 6, 2003, Krieger and attorney Douglas Connon (“Connon”) met with members of the special committee established by the Board to investigate the allegations in the November 21 letter. At the meeting, Connon told the members of the committee that he was representing Potter and that he had her power of attorney. In a series of later letters, dated March 19, 2003, April 7, 2003, June 23, 2003, and November 1, 2003, Krieger wrote to the Board reiterating the complaints relating to the PSIC transaction that he had raised in the demand letter, and also asked the Board to provide him information concerning the Canadian transaction. When the Board did not take action that Krieger and Potter found satisfactory, they sued.
II
Having doubts about the foundation for federal question jurisdiction under 28 U.S.C. § 1331, the panel by order raised the issue of subject matter jurisdiction sua [1055] sponte and received additional briefing. Having reviewed the briefing and having considered the matter further, we take no position on whether Appellants’ complaint raises a sufficient federal question under 28 U.S.C. § 1331 because we instead conclude that we may consider at the outset whether Potter satisfied Federal Rule of Civil Procedure 23.1. Deciding that Rule 23.1 was not satisfied, we hold that the complaint should be dismissed and we need not further address jurisdiction.
Supreme Court precedent is clear that we “may choose among threshold grounds for denying audience to a case on the merits.” Wilbur v. Locke, 423 F.3d 1101, 1106 (9th Cir.2005) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 585, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999)); see also Ruhrgas AG, 526 U.S. at 584, 119 S.Ct. 1563 (“While Steel Co. [v. Citizens for a Better Environment, 523 U.S. 83, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998),] reasoned that subject-matter jurisdiction necessarily precedes a ruling on the merits, the same principle does not dictate a sequencing of jurisdictional issues”). These precedents apply most commonly where both of the competing threshold issues go to the court’s power under the Constitution.
However, there are non-constitutional grounds on which we may dismiss a suit before considering the existence of federal subject matter jurisdiction. These include jurisdictional grounds that are discretionary, such as pendent jurisdiction or Younger abstention, see Steel Co., 523 U.S. at 100 n. 3, 118 S.Ct. 1003, grounds of prudential standing, such as statutory standing, see National R.R. Passenger Corp. v. National Ass’n of R.R. Passengers, 414 U.S. 453, 465 n. 13, 94 S.Ct. 690, 38 L.Ed.2d 646 (1974) (“Since we hold that no right of action exists, questions of standing and jurisdiction became immaterial.”), and grounds that are “logically antecedent to the existence of any Article III issues,” such as class certification under Federal Rule of Civil Procedure 23, see Ortiz v. Fibreboard Corp., 527 U.S. 815, 831, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999); Amchem Prods. v. Windsor, 521 U.S. 591, 612-13, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997).
Free access — add to your briefcase to read the full text and ask questions with AI
Opinion by Judge GOULD; Dissent by Judge IKUTA.
GOULD, Circuit Judge:
In this shareholder’s derivative action, Plaintiff-Appellant Katherine Potter (“Potter”) alleges that the Defendants-Appel-lees (collectively, “Defendants”), who are managers and directors of Public Storage, Inc. (“PS”), wrongfully managed PS. The district court dismissed the action on the grounds that Potter failed to make an adequate demand on the Board of Directors of PS (“Board”) before filing her suit. We affirm.
[1054] I
PS is a California corporation that is publicly traded on the New York Stock Exchange. Potter and Co-Plaintiff Charles Krieger (“Krieger”) filed a derivative complaint against PS and sixteen individual defendants on December 30, 2004, alleging twelve causes of action including waste of corporate assets, breach of fiduciary duty, fraud, and violation of the Sar-banes-Oxley Act of 2002, 15 U.S.C. §§ 7201-7266. These allegations related to three alleged transactions: (1) PS’s acquisition of an entity known as PSIC (“PSIC transaction”); (2) the use of PS resources to provide services to a Canadian business owned by the Hughes family, who are prominent members of the Board (“Canadian transaction”); and (3) PS’s payment of management and advisory fees to entities owned by other defendants (“M & A transaction”). Upon Defendants’ motion to dismiss, the district court dismissed the complaint with leave to amend, concluding that Krieger and Potter did not satisfy the requirements of Rule 23.1 of the Federal Rules of Civil Procedure and California law.1
Potter and Krieger filed an amended complaint on July 12, 2005, alleging the same twelve causes of action but this time relating them to only two transactions, the PSIC transaction and the Canadian transaction. Defendants once again moved to dismiss, and the district court dismissed the second complaint, concluding that Krieger failed the contemporaneous ownership requirement and that Potter failed to make an adequate demand on the Board.
Krieger does not appeal Ms dismissal, so this appeal concerns only the adequacy of Potter’s demand on the Board. However, Krieger plays a major role in the facts leading to Potter’s appeal. Krieger sent a demand letter to the Board on November 21, 2002. This letter complained of the PSIC transaction but did not discuss the Canadian transaction. It also did not mention Potter by name, but noted that “[t]wo individuals ... who reside in Southern California where the lawsuit will be filed will join with me to bring the action.” Potter alleges that she was one of the two unnamed individuals to whom Krieger was referring in the letter.
On January 6, 2003, Krieger and attorney Douglas Connon (“Connon”) met with members of the special committee established by the Board to investigate the allegations in the November 21 letter. At the meeting, Connon told the members of the committee that he was representing Potter and that he had her power of attorney. In a series of later letters, dated March 19, 2003, April 7, 2003, June 23, 2003, and November 1, 2003, Krieger wrote to the Board reiterating the complaints relating to the PSIC transaction that he had raised in the demand letter, and also asked the Board to provide him information concerning the Canadian transaction. When the Board did not take action that Krieger and Potter found satisfactory, they sued.
II
Having doubts about the foundation for federal question jurisdiction under 28 U.S.C. § 1331, the panel by order raised the issue of subject matter jurisdiction sua [1055] sponte and received additional briefing. Having reviewed the briefing and having considered the matter further, we take no position on whether Appellants’ complaint raises a sufficient federal question under 28 U.S.C. § 1331 because we instead conclude that we may consider at the outset whether Potter satisfied Federal Rule of Civil Procedure 23.1. Deciding that Rule 23.1 was not satisfied, we hold that the complaint should be dismissed and we need not further address jurisdiction.
Supreme Court precedent is clear that we “may choose among threshold grounds for denying audience to a case on the merits.” Wilbur v. Locke, 423 F.3d 1101, 1106 (9th Cir.2005) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 585, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999)); see also Ruhrgas AG, 526 U.S. at 584, 119 S.Ct. 1563 (“While Steel Co. [v. Citizens for a Better Environment, 523 U.S. 83, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998),] reasoned that subject-matter jurisdiction necessarily precedes a ruling on the merits, the same principle does not dictate a sequencing of jurisdictional issues”). These precedents apply most commonly where both of the competing threshold issues go to the court’s power under the Constitution.
However, there are non-constitutional grounds on which we may dismiss a suit before considering the existence of federal subject matter jurisdiction. These include jurisdictional grounds that are discretionary, such as pendent jurisdiction or Younger abstention, see Steel Co., 523 U.S. at 100 n. 3, 118 S.Ct. 1003, grounds of prudential standing, such as statutory standing, see National R.R. Passenger Corp. v. National Ass’n of R.R. Passengers, 414 U.S. 453, 465 n. 13, 94 S.Ct. 690, 38 L.Ed.2d 646 (1974) (“Since we hold that no right of action exists, questions of standing and jurisdiction became immaterial.”), and grounds that are “logically antecedent to the existence of any Article III issues,” such as class certification under Federal Rule of Civil Procedure 23, see Ortiz v. Fibreboard Corp., 527 U.S. 815, 831, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999); Amchem Prods. v. Windsor, 521 U.S. 591, 612-13, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997).
In this case, the issue of whether Potter satisfied the demand pleading requirements of Rule 23.1 is “logically antecedent” to the issue of whether we have jurisdiction over this action. Pursuant to Rule 23.1, a putative derivative plaintiff can initiate a derivative action only if he or she makes an adequate demand on the Board under applicable state law. Fed.R.Civ.P. 23.1 (2008); see also Kayes, 51 F.3d at 1463 n. 10. Therefore, unless we determine that a proper demand was made, there is no lawsuit over which to exercise jurisdiction. Thus, as in Ortiz and Am-chem, the jurisdictional issue would not exist but for this court’s determination regarding the adequacy of Potter’s demand. Accordingly, it is appropriate for us to reach the Rule 23.1 issue first. See Ortiz, 527 U.S. at 831, 119 S.Ct. 2295; Amchem, 521 U.S. at 613, 117 S.Ct. 2231.
We note also that a valid demand is a requirement for statutory standing under California law. Shields v. Singleton, 15 Cal.App.4th 1611, 1618, 19 Cal.Rptr.2d 459 (1993). Although California courts do not define the limits of our jurisdiction, this required demand supports our conclusion that the satisfaction of the requirements of Rule 23.1 is a logical antecedent to federal jurisdictional questions. See Ortiz, 527 U.S. at 831, 119 S.Ct. 2295 (noting that Rule 23 certification is “logically antecedent to Article III concerns, and ... pertain[s] to statutory standing, which may properly be treated before Article III standing”).
[1056] Accordingly, we address whether Rule 23.1 was satisfied both because compliance with Rule 23.1 is ‘logically antecedent’ to assessing Article III issues, and because this raises an issue of state statutory standing.2
III
The parties disagree about the applicable standard of review. Potter argues that because her complaint was dismissed, we should review the district court’s dismissal de novo. Defendants argue that district court determinations regarding the demand requirement for derivative actions are reviewed for abuse of discretion.
Defendants are correct. Although dismissals for failure to state a claim are reviewed de novo, the district court’s determination that Potter did not comply with Rule 23.1 or California law regarding the demand and regarding demand futility is reviewed for abuse of discretion. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 983 (9th Cir.1999); see also Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1210 (9th Cir.1980) (“The district court determined that Greenspun failed to make a demand and that such a demand would not have been futile. We must affirm unless the district court abused its discretion in reaching this conclusion.”).
IV
Federal Rule of Civil Procedure 23.1 permits a plaintiff to bring a shareholder derivative suit if two requirements are met. First, the plaintiff must have owned shares in the corporation at the time of the disputed transaction (the “contemporary ownership requirement”). Second, the plaintiff must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors” (the “demand requirement”). However, failure to meet the demand requirement may be excused if the facts show that demand would have been futile. Smith v. Sperling, 354 U.S. 91, 96-97, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957); Fed.R.Civ.P. 23.1 (2008). In this appeal, the questions are whether Potter adequately made a demand and, if not, whether the lack of demand is excused as futile.
A
We first consider whether Potter made a valid demand on the Board for either or both of the transactions raised in the complaint. The parties do not dispute that a valid demand must give the board of directors the opportunity to consider and act upon the proposed litigation by presenting to the board the ultimate facts of each cause of action and the action which plaintiff wishes the board to take to remedy the alleged wrongdoing. Shields, 15 Cal.App.4th at 1618, 19 Cal.Rptr.2d 459; see also Lewis v. Sporck, 646 F.Supp. 574, 578 (N.D.Cal.1986) (listing factors).
[1057] Defendants argue that although these elements were generally present in Krieger’s letters regarding PSIC, Potter failed to make a valid demand about that transaction because she was not named in the demand letter. The November 21, 2002 demand letter was sent by Krieger alone and it did not mention Potter by name. Potter argues that the mere absence of her name should not invalidate an otherwise valid demand, and that the Board was informed of Potter’s participation at the time of the January 6, 2003 meeting, which Potter’s attorney, Connon, attended.
The gist of the Defendants’ position is that the identity of the plaintiff shareholder is a required element of a valid demand, and for us the dispositive issue is whether Defendants are correct in this respect. Stated another way, the key issue is whether Potter failed to make a demand by remaining anonymous in Krieger’s letters.
In support of their contention, Defendants rely primarily upon a Delaware case, Smachlo v. Birkelo, 576 F.Supp. 1439, 1444 (D.Del.1983). In Smachlo, the district court considered a demand letter sent by a shareholder’s attorney. Like Krieger’s letter in this case, the demand letter in Smachlo did not identify the shareholders making the demand, stating only that the attorney-author “represents the owners of approximately 2,000 shares of El Paso stock.... ” Id. The district court in Sma-chlo concluded that the letter was not a valid demand because it failed to include the name of the shareholder making the demand, and that “a company’s board of directors should not be required to act upon the demand of an alleged shareholder when that shareholder fails to properly identify himself.” Id.
Smachlo is directly on point. Although the case applies Delaware law, California law, as we have said, is identical to Delaware law on the demand requirement. See Oakland Raiders, 93 Cal.App.4th at 586 & 586 n. 5, 113 Cal.Rptr.2d 255 (noting reliance on Delaware law); Shields, 15 Cal. App.4th at 1621, 19 Cal.Rptr.2d 459 (noting that California and Delaware law are substantively identical on the demand requirement).
Potter’s efforts to distinguish Smachlo do not persuade us. It is of no moment that the letter in Smachlo did not identify any potential plaintiffs, while the November 21, 2002 letter identified Krieger, because Krieger’s known presence does not relieve Potter of the obligation to make a valid demand. A plain reading of Rule 23.1 also supports this result. Rule 23.1 requires particularized pleading of the efforts undertaken by the plaintiff. In this case, Potter has alleged only that Krieger undertook efforts to demand action by the Board. Even if Krieger purported also to represent additional unnamed plaintiffs in Southern California, and one of these unnamed plaintiffs was Potter, the complaint simply does not show that Potter herself undertook any efforts to demand action from the Board.
The facts here make the attempt to distinguish Smachlo especially unconvincing, because the district court held that Krieger could not bring a derivative suit because he failed the contemporaneous ownership requirement. Because Krieger was not qualified to make a demand due to his lack of contemporaneous ownership, it would be an odd result if Potter were allowed to remain anonymous in reliance on the demand made by Krieger, who beyond doubt did not satisfy Rule 23.1.
The identity of the shareholder is also an important practical element of a demand. The identity of the complaining shareholder may shed light on the veracity or significance of the facts alleged in the demand letter, and the Board might properly take a different course of action de[1058] pending on the shareholder’s identity. Before a demand letter can properly invoke a duty of a corporate board to take action to correct alleged wrongdoing, the board is entitled to know with specificity the identity of the person making the demand. See generally 5 James Wm. Moore et al., Moore’s Federal PractiCE § 23.1.08 (“The demand requirement permits the board to correct the alleged wrong, encourages in-tra-corporate dispute resolution, and allows the board to use its expertise and resources to control litigation.”).
This is not merely a technical or unimportant requirement. Rather, the general rule of American law is that the board of directors controls a corporation. Accordingly, strict compliance with Rule 23.1 and the applicable substantive law is necessary before a derivative suit can wrest control of an issue from the board of directors. As a leading treatise observes, “[t]he demand requirement is designed to promote the basic principle of corporate governance that the board of directors, and not individual shareholders, manages the affairs of the corporation.” Id.
Potter argues that her attorney’s attendance at the January 6, 2003 meeting with members of PS’s special committee amounted to a valid demand because the Board learned of Potter’s identity at that time. But as Defendants point out, the complaint does not allege that the attorney said anything at the meeting that would amount to a legal demand. Nor does Potter allege that the attorney submitted any demand to the Board in writing, as California law requires. See Cal. Corp.Code § 800(b)(2). The Board was entitled to receive a valid demand and was not required to piece together by inference the disparate events that, if taken together, might have been sufficient to require corporate action. Accordingly, the district court did not abuse its discretion in concluding that Potter failed to make an adequate demand.
B
We next consider whether Potter sufficiently alleged that making a demand on the Board would have been futile. Potter argues that her suit should be allowed to proceed even if she failed to make a valid demand, because making such a demand would have been futile. The test for proving the futility of a demand for relief is whether the facts show a reasonable doubt that “(1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” In re Silicon Graphics Inc. Sec. Litig., 183 F.3d at 989-90 (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) (overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del.2000))). Potter has alleged demand futility on appeal only with regard to the Canadian transaction. She alleges that the members of the Board were interested in the transaction or were not independent because they were dominated by the Hughes family, which held several seats on the Board.
Potter’s demand futility argument fails. Most significantly, Potter’s allegations are not complete and detailed enough to excuse her from the demand requirement. “[I]n order to evaluate the demand futility claim, the court must be apprised of facts specific to each director from which it can conclude that .that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.” Shields, 15 Cal.App.4th at 1622, 19 Cal.Rptr.2d 459.
The complaint contains few details about the members of the Board aside from the fact that they voted for the transactions that Potter disputes. These alie-[1059] gations, taken alone, are insufficient as a matter of law. “[W]here mere approval of corporate action, absent self-interest or other indication of bias, is the sole basis for establishing the director’s ‘wrongdoing’ and hence for excusing demand on them, plaintiffs suit should ordinarily be dismissed.” Greenspun, 634 F.2d at 1210 (internal citation omitted). And while Potter does make some specific accusations about the directors, only a few directors are alleged to have any interests that might excuse demand if held by a majority of the Board. A majority of the 13 directors discussed in the complaint are not alleged to have any interest that would make them unable to consider a demand made by a shareholder. Also, that the Board appointed a special committee to consider Krieger’s demands regarding the PSIC transaction reflects rather poorly on Potter’s argument that the same Board would not have taken at least that step to consider the Canadian transaction, which, Potter alleges, was a product of the same self-dealing.
Accordingly, Potter’s allegations do not create a reasonable doubt as to the Board’s overall honesty or independence, and she is not excused from the demand requirement.3 As we have explained, “[t]he task of demanding action under Rule 23.1 is not onerous. No policy recommends eviscerating the demand requirement as plaintiff would have us do.” Greenspun, 634 F.2d at 1210.
AFFIRMED.