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Keywords

lawsuitplaintiffappealcorporation
lawsuitplaintiffappealcorporation

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Marx v. Akers, 88 N.Y.2d 189, 666 N.E.2d 1034, 644 N.Y.S.2d 121, 64 USLW 2679

Facts

The plaintiff initiated a shareholder derivative action against IBM and its board of directors without first demanding that the board take action. The amended complaint alleged that the board wasted corporate assets by awarding excessive compensation to IBM's executives and outside directors during a period of declining profitability. The complaint identified only one of the inside directors as an executive and claimed that the board engaged in self-dealing by approving high compensation for outside directors.

The plaintiff initiated a shareholder derivative action against IBM and its board of directors without first demanding that the board take action. The amended complaint alleged that the board wasted corporate assets by awarding excessive compensation to IBM's executives and outside directors during a period of declining profitability.

Issue

Did the Appellate Division abuse its discretion by dismissing the plaintiff's complaint for failure to make a demand on the board, and does the complaint state a cause of action for corporate waste?

Did the Appellate Division abuse its discretion by dismissing the plaintiff's complaint for failure to make a demand on the board, and does the complaint state a cause of action for corporate waste?

Rule

Under Business Corporation Law § 626(c), a shareholder must make a demand on the board to initiate a lawsuit unless such demand would be futile. A demand is excused if the complaint alleges with particularity that a majority of the directors are interested in the transaction or failed to inform themselves adequately about it.

Under Business Corporation Law § 626(c), a shareholder must make a demand on the board to initiate a lawsuit unless such demand would be futile.

Analysis

The court found that the plaintiff did not sufficiently establish that a demand would have been futile regarding the executive compensation claims, as only three directors were alleged to have received benefits from the compensation scheme. However, the court acknowledged that the outside directors, who comprised a majority of the board, were self-interested in their own compensation, thus excusing the demand for that part of the complaint. Despite this, the court concluded that the plaintiff failed to state a cause of action regarding the excessive compensation claims.

The court found that the plaintiff did not sufficiently establish that a demand would have been futile regarding the executive compensation claims, as only three directors were alleged to have received benefits from the compensation scheme.

Conclusion

The Court of Appeals affirmed the Appellate Division's order, concluding that while the demand was excused for the outside directors' compensation claims, the plaintiff did not state a valid cause of action for corporate waste, leading to the dismissal of the complaint in its entirety.

The Court of Appeals affirmed the Appellate Division's order, concluding that while the demand was excused for the outside directors' compensation claims, the plaintiff did not state a valid cause of action for corporate waste, leading to the dismissal of the complaint in its entirety.

Who won?

IBM and its board of directors prevailed in the case because the court found that the plaintiff failed to adequately demonstrate the futility of making a demand regarding executive compensation and did not state a valid cause of action for corporate waste.

IBM and its board of directors prevailed in the case because the court found that the plaintiff failed to adequately demonstrate the futility of making a demand regarding executive compensation and did not state a valid cause of action for corporate waste.

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