By Brendan Pierson, Portfolio Media

A court dismissed a derivative shareholder suit against Computer Sciences Corp. over alleged options backdating on Wednesday for the second time, saying that the plaintiffs had failed to show that it would be futile to ask the company's board of directors to file a suit.

The same suit was already dismissed in May, but the judge had given the plaintiffs leave to amend. The plaintiffs, led by a union representing the company's workers, added additional evidence allegedly showing that the entire board of directors had been involved in a conflict of interest.

“[T]he court finds that plaintiffs still have not pled with sufficient particularity why demand should be excused in this case,” wrote Judge Mariana Pfaelzer, of the Central District of California.

In their original complaint, the plaintiffs had presented evidence that the board had been personally involved in granting back-dated stock options to executives and concealing the costs from investors. Thus, they argued, they could not ask the board to file a derivative shareholder suit, as would normally be required.

The court found that they had only shown reasonable doubt about the disinterestedness of three of the seven directors, while demand futility requires a majority.

In the new version of their complaint, the plaintiffs relied on a document that said that “[o]ptions grants to Senior Executives were approved by the Compensation Committee or the Board of Directors.”

The court found that this was not specific enough to show demand futility. The dismissal may signal a trend in the wave of derivative shareholder suits filed as a result of the options backdating of the last few years, several of which have been dismissed without prejudice and await repleading.

“I think what we're seeing is a trend in the options backdating cases of courts recognizing the importance of the board of directors [in bringing derivative shareholder actions],” said Dean Kitchens, a partner at Gibson Dunn & Crutcher and attorney for the defendant.

A number of options backdating derivative shareholder suits filed in 2005 and 2006 have been dismissed in recent months because, the judges have ruled, the plaintiffs failed to adequately show demand futility. As the plaintiffs in these cases regroup and prepare to refile amended complaints, other cases may face a similar fate.

In addition to the Computer Science case, suits against Bed Bath & Beyond and CNET Networks Inc. have been dismissed in the last few months by federal and state court judges for failing to sufficiently plead demand futility.

Since derivative suits like these are ostensibly filed on behalf of the corporation against directors and executives, plaintiffs are required to first ask the board of directors to pursue claims before filing a suit themselves. If plaintiffs don’t seek approval from the board, they must prove that it would have been futile to do so.

Plaintiffs can prove futility if they show specific evidence proving that the board was interested in the litigation. This requires the plaintiffs to implicate a majority of the board in the alleged options backdating activities.

Given the strict requirements of demand futility, the recent dismissals have come as no surprise to many securities attorneys.

Filing a motion to dismiss based on a failure to show demand futility is one of the first weapons in a defense attorney’s arsenal, said Scott Meyers, a partner and chair of the litigation practice group at Levenfeld Pearlstein LLC. When faced with any derivative shareholder suit, defense attorneys will attack the complaint at basic levels, arguing that pleading standards were not met.

“The first round of complaints are usually not the best,” Meyers said. “The first complaints usually have thin allegations and there is not a lot of case law instructing the plaintiffs as to what the courts will demand. So, some judges are being aggressive in viewing these complaints.”

In options backdating derivative suits, if a judge finds that the complaint failed to show that a majority of the board played a role in the alleged scandal, he or she can dismiss the suit.

The plaintiffs are represented by Barrack Rodos & Bacine LLP.

Computer Sciences Corp. is represented by Gibson Dunn & Crutcher LLP.

The case is Laborers International Union of North America National Industrial Pension Fund v. Irving W Bailey II et al., case number 2:06-cv-05288 in the U.S. District Court for the Central District of California.