Eisenberg v. Flying Tiger Line, Inc.

United States Court of Appeals for the Second Circuit · 1971 · Corporations

Corporationsderivative suitrepresentative actionsecurity for costsNew York Business Corporation Law § 627New York Business Corporation Law § 626shareholder voting rightsmerger

Facts

Flying Tiger, a Delaware corporation, carried out a 1969 reorganization through two wholly owned Delaware subsidiaries so that the original operating company merged into a subsidiary and ceased to exist, while shareholders received shares in a holding company. Eisenberg alleged that these maneuvers were intended to dilute or deprive minority shareholders of their voting rights in the operating company. He sued as a stockholder on behalf of himself and similarly situated stockholders to enjoin the plan. Flying Tiger argued the suit was derivative and sought security for costs under New York Business Corporation Law § 627.

Issue

Was Eisenberg's suit one 'in the right of' the corporation and therefore derivative under New York Business Corporation Law §§ 626 and 627, such that he had to post security for costs? Or was it instead a representative action asserting shareholders' own rights, making § 627 inapplicable?

Rule

In applying New York's security-for-costs statute, a court must require security only in actions that are derivative within the meaning of Business Corporation Law § 626. A suit is not derivative when the alleged injury is to shareholders individually as shareholders—such as deprivation of voting or participatory rights—and the action is not brought to procure a judgment in the corporation's favor.

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Nora Patel, a minority shareholder of Lakefront Transit Holdings, sues in federal court in Manhattan to block a restructuring approved in Chicago. Under the plan, the operating rail business will become a wholly owned subsidiary of a new holding company, and Nora alleges the change will strip shareholders of any direct vote over the operating company's affairs; she seeks only injunctive relief.

If the corporation moves under New York Business Corporation Law § 627 to require Nora to post security for costs, how should the court rule?

Explanation. Section 627 applies only to actions specified in § 626—that is, suits brought in the right of the corporation to procure a judgment in its favor. A suit alleging deprivation of shareholders' own voting or participatory rights is representative, not derivative, even if undoing the transaction would alter the corporate structure. Because Nora seeks to protect rights belonging to shareholders per se, security should not be required. (Derived from Eisenberg v. Flying Tiger Line, Inc. (1971).)