Marx v. Akers

New York Court of Appeals · 1996 · Corporations

CorporationsShareholder derivative actionsDemand futilityCorporate wasteDirector compensationderivative suitdemand requirementdemand futility

Facts

Plaintiff alleged that IBM's board wasted corporate assets by awarding excessive compensation to IBM executives and to the 15 outside directors on its 18-member board during a period of declining profitability. The complaint asserted that the outside directors engaged in self-dealing by approving their own compensation and that the board also approved unreasonably high executive compensation. Plaintiff made no demand on the board, alleging demand would be futile because the directors had authorized, approved, participated in, or acquiesced in the challenged transactions and could not be expected to sue themselves. The complaint alleged that outside-director compensation rose from $20,000 plus $500 per meeting to a $55,000 retainer plus 100 shares of IBM stock over five years.

Issue

Whether plaintiff's failure to make a pre-suit demand on IBM's board was excused as futile under New York law. Whether the complaint nevertheless failed to state a cause of action for corporate waste based on the alleged excessiveness of compensation paid to IBM's outside directors.

Rule

Under New York law, demand is excused as futile only when the complaint alleges with particularity that: (1) a majority of the directors are interested in the challenged transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction, including where the transaction is so egregious on its face that it could not have resulted from sound business judgment. Mere conclusory allegations or the naming of a majority of directors as defendants are insufficient. A complaint challenging director compensation must allege compensation excessive on its face or other facts calling into question the fairness of the compensation to the corporation, the directors' good faith, or whether the decision could have been a product of valid business judgment.

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

Blue Mesa Robotics, Inc., a New York corporation based in Denver, has a 9-member board. Five outside directors vote to increase the annual cash stipend paid only to outside directors, and shareholder Lena Ortiz files a derivative suit in New York without first asking the board to sue.

Under New York law as stated by the majority opinion, is pre-suit demand most likely excused?

Explanation. Demand futility and stating a substantive claim are separate questions. Demand is excused when the complaint alleges with particularity that a majority of the board is interested in the challenged transaction. Directors who vote themselves director compensation are interested because they receive a direct financial benefit not shared by shareholders generally. That is enough to excuse demand, even though the complaint must still separately state a viable waste claim.