Aviv v. Szulczewski

Background

Oren Aviv filed a shareholder derivative complaint concerning Wish and its board of directors. In a derivative action, a shareholder seeks to assert claims on behalf of the company. Aviv alleged that the board allowed Wish’s CEO, Piotr Szulczewski, to hold loud parties at the “Wish House,” a mansion in Los Angeles. According to the allegations, social media influencers attended the parties, which continued into the early morning; vendors and guests parked illegally; and noise changed the neighborhood into what Aviv described as a commercial event space. Aviv contended that the board allowed the company to create a public and private nuisance by violating zoning ordinances.

Aviv also asserted a claim under the federal Securities Exchange Act, alleging that Wish made misleading statements in its 2021 proxy statement.

Demand Futility

Federal Rule of Civil Procedure 23.1 requires a shareholder derivative complaint to plead with particularity why making a demand on the company’s board would have been futile. Demand futility is evaluated director by director. A demand may be excused when a director would face a substantial likelihood of liability on the claims the shareholder asks the company to pursue.

The court discussed the board-liability standard from Caremark and related cases. Directors may face liability when they knew or should have known that legal violations were occurring and their inaction harmed the company. A plaintiff must generally show either that the directors completely failed to create reporting or information systems and controls, or that they consciously failed to monitor or oversee the company despite having warning signs of illegal activity.

The court held that Aviv did not adequately plead demand futility. The complaint did not state what the directors knew or when they knew it. It also did not allege facts showing that the directors knew about the alleged illegal activity or encountered warning signs concerning violations of local law that would have required them to oversee the company’s activities.

Securities Exchange Act Claim

The court also rejected Aviv’s Exchange Act claim at the pleading stage. Although Aviv alleged that Wish’s 2021 proxy statement contained misleading statements, he did not identify any specific statements that were false or misleading.

Disposition

Judge Chhabria granted the defendants’ motion to dismiss. The complaint was dismissed for failure to plead demand futility with particularity under Rule 23.1. The dismissal was with leave to amend, and any amended complaint had to be filed within 21 days of the order. If Aviv did not file an amended complaint by that deadline, the dismissal would be with prejudice.