Kamen v. Kemper Fin. Services, Inc.

Supreme Court of the United States · 1991 · Corporations

500 U.S. 90 (1991)

Updated August 22, 2026

CorporationsDerivative actionsDemand requirementFederal common lawInvestment Company Act of 1940shareholder derivative suitdemand futilityRule 23.1

Facts

Petitioner sued derivatively on behalf of Cash Equivalent Fund, Inc., a registered investment company incorporated in Maryland, against Kemper Financial Services, Inc., the Fund's investment adviser. She alleged that KFS obtained shareholder approval of the adviser contract through a proxy statement that materially misrepresented KFS' fees in violation of § 20(a) of the Investment Company Act. Petitioner made no precomplaint demand on the Fund's board, alleging demand would have been futile because all directors were under KFS' control, the board had unanimously approved the challenged proxy statement, and the board later showed hostility to her claim by moving to dismiss. The lower courts treated the failure to make demand as fatal, and the court of appeals adopted a universal-demand rule as federal common law.

Issue

When a shareholder brings a derivative action founded on the Investment Company Act, must a federal court impose a uniform federal rule requiring demand on the board even when demand would be excused as futile under the law of the state of incorporation? More specifically, should federal courts displace state demand-futility law with a universal-demand rule in ICA derivative actions?

Rule

Where a gap in the federal securities laws must be filled by a rule bearing on the allocation of governing powers within the corporation, federal courts should incorporate state law as the federal rule of decision unless the particular state law is inconsistent with the policies underlying the federal statute. Because the scope of the demand requirement, including futility, determines who controls corporate litigation, a court entertaining a derivative action under the ICA must apply the demand-futility exception as defined by the law of the state of incorporation unless that state law frustrates the ICA's objectives.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nadia Patel, a shareholder of Harbor Crest Income Fund, files a derivative suit in federal court in Chicago under the Investment Company Act against the fund's adviser, Blue Lantern Advisory. Harbor Crest is incorporated in Delaware, whose law would excuse demand if a majority of directors approved the challenged transaction, but the defendants argue the court should require demand in every ICA derivative case to promote national uniformity.

Which law should the federal court apply to determine whether Nadia's failure to make demand is excused?

Explanation. The Court held that when a federal securities-law gap concerns the allocation of governing power within the corporation, federal courts incorporate the law of the state of incorporation as the federal rule of decision unless that particular state law is inconsistent with federal policy. Demand futility affects who controls corporate litigation, so Delaware law governs here unless inconsistent with the ICA. Rule 23.1 is only a pleading rule and does not itself supply the substantive demand standard. (Derived from Kamen v. Kemper Fin. Services, Inc. (1991).)