Burks v. Lasker

Supreme Court of the United States · 1979 · Corporations

441 U.S. 471 (1979)

Updated August 22, 2026

CorporationsDerivative suitsInvestment Company ActInvestment Advisers ActFederal-state law interactionbusiness judgment rulederivative actionindependent directors

Facts

Respondent shareholders of Fundamental Investors, Inc. filed a derivative suit against several directors and the company's investment adviser arising from the company's purchase of $20 million in Penn Central commercial paper. Fundamental's board designated the five directors who were neither affiliated with the adviser nor defendants in the action to determine the company's position in the litigation. After investigation and advice from outside counsel, those five directors, acting as a quorum under the bylaws, concluded that continuing the suit was contrary to the company's and shareholders' best interests and moved to dismiss. The district court found no evidence that these directors acted other than independently and in good faith.

Issue

May disinterested directors of an investment company terminate a shareholder derivative suit brought against other directors under the Investment Company Act and Investment Advisers Act? More specifically, should federal courts apply state corporate law on directors' authority to terminate such suits, and if so, under what limitation from federal law?

Rule

When a derivative suit is based on assumed federal causes of action under the ICA and IAA, federal courts should look first to state corporation law to determine whether disinterested directors have authority to discontinue the suit. State law governs unless it permits action prohibited by the federal statutes or its application would be inconsistent with the federal policy underlying the federal cause of action. Congress did not require an absolute rule forbidding directors from terminating all nonfrivolous derivative suits.

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Investors in Lakefront Growth Fund, a Maryland corporation based in Chicago, file a derivative action in federal court alleging violations of the Investment Company Act and the Investment Advisers Act by the fund's adviser and several affiliated directors. After an outside investigation, a committee of concededly independent directors votes to seek dismissal under a Maryland rule that generally lets disinterested directors decide whether corporate claims should continue.

What is the best approach for the federal court?

Explanation. The majority held that when shareholders assert derivative federal claims under the ICA and IAA, federal courts should look first to state corporation law to determine directors' authority to discontinue the suit. State law governs unless it permits action prohibited by the federal statutes or its application would be inconsistent with the federal policy underlying the federal cause of action.