Title: In re Guidant Shareholders Derivative Litigation v. Ronald Donnels

State: indiana

Issuer: Indiana Supreme Court

Document:

ATTORNEYS FOR PLAINTIFFS 
 
 
 
 
ATTORNEYS FOR DEFENDANTS 
Irwin B. Levin 
James H. Ham, III 
Richard E. Shevitz 
John R. Schaibley, III 
Scott D. Gilchrist 
Indianapolis, Indiana 
Eric S. Pavlack 
Indianapolis, Indiana 
Boris Feldman 
 
Nina F. Locker 
James A.L. Buddenbaum 
Keith E. Eggleton 
Anthony W. Patterson 
Cheryl W. Foung 
Indianapolis, Indiana 
Palo Alto, California 
 
Darren J. Robbins 
ATTORNEYS FOR AMICUS CURIAE 
Randall J. Baron 
Karl L. Mulvaney 
Kevin K. Green 
Nana Quay-Smith 
San Diego, California 
Indianapolis, Indiana 
 
 
In the 
Indiana Supreme Court  
_________________________________ 
 
No. 94S00-0407-CQ-318 
 
IN RE GUIDANT SHAREHOLDERS DERIVATIVE LITIGATION, 
 
KELBOURNE J. RITTER, ET AL., 
 
 
 
 
 
 
 
 
Plaintiffs, 
 
v. 
 
RONALD W. DOLLENS, ET AL., 
 
 
 
 
 
 
 
 
Defendants. 
_________________________________ 
 
Certified Question from the United States District Court, 
Southern District of Indiana, No. 1:03-CV-955-SEB-WTL 
The Honorable Sarah Evans Barker, Judge 
_________________________________ 
 
 
February 2, 2006 
 
Shepard, Chief Justice. 
 
 
1
 
The U.S. District Court of the Southern District of Indiana has asked us if passage of the 
Indiana Business Corporation Law in 1986 requires a shareholder commencing a derivative 
lawsuit to make a written demand on the corporation unless irreparable injury to the corporation 
would result, or if demand is still excused if it would be futile.  Pursuant to Indiana Appellate 
Rule 64, Judge Sarah Evans Barker has certified the following question of Indiana law: 
 
Under Indiana Code § 23-1-32-2, regarding futility, by what legal 
standard should a court evaluate a shareholder’s decision not to 
make demand to a public corporation’s board of directors before 
filing a derivative suit? 
 
We have accepted this certified question and now hold that the Indiana Business 
Corporation Law retains the futility standard, but narrows its applicability substantially by 
authorizing corporations to establish disinterested committees to determine whether the 
corporation should pursue certain claims. 
 
 
Facts and Procedural History 
 
 
Guidant Corporation is an Indiana company that develops, manufactures, and distributes 
cardiovascular medical products.  Endovascular Technologies Inc. is a wholly owned subsidiary 
of Guidant.  Endovascular designed the Ancure Endograft System to treat abdominal aortic 
aneurysms and received FDA approval for commercial sale in the United States in 1999.  In June 
2003, after an investigation into defects in the device, the incomplete handling and reporting of 
complaints, inadequate corrective actions, and FDA violations, Guidant pled guilty to one felony 
count of making false statements to a federal agency and nine felony counts of shipping 
misbranded medical devices in interstate commerce.  Guidant also agreed to pay a $43.4 million 
criminal fine and a $49 million civil settlement. 
 
 
Six Guidant shareholder derivative actions were filed on behalf of Guidant in response to 
these events, and they were consolidated in the Southern District of Indiana with Alaska 
Electrical Pension Fund as the lead derivative plaintiff.  On December 17, 2003, Alaska 
Electrical filed the consolidated complaint alleging breach of fiduciary duty, abuse of control, 
 
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gross mismanagement, and waste of corporate assets against Guidant’s entire board of directors.1  
The directors moved to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to 
state a claim, asserting that the plaintiffs had not made a demand on the board of directors.  
Alaska Electrical countered that the complaint showed a demand would have been useless, 
excusing failure to do so. 
 
 
I.  Indiana Has Long Recognized Demand Futility 
 
 
Normally, a shareholder wishing to file a derivative lawsuit to pursue a corporation’s 
rights must first demand that the board of directors take action.  See Wayne Pike Co. v. 
Hammons, 129 Ind. 368, 27 N.E. 487 (1891).  Since the late 19th century, Indiana has 
consistently recognized an excuse from the demand requirement where the shareholder alleges 
with particularity in a verified complaint that a majority of the board of directors are either the 
tortfeasors and/or interested in the transaction at issue.  Perlman v. Feldmann, 129 F.Supp. 162, 
194 (D. Conn. 1952)(applying Indiana law), rev’d on other grounds, 219 F.2d 173 (2nd Cir. 
1955); Wayne Pike Co., 129 Ind. at 375-78, 27 N.E. at 489-90; Cole Real Estate Corp. v. Peoples 
Bank & Trust Co., 160 Ind. App. 88, 310 N.E.2d 275, (1974); First Merchs. Nat’l Bank & Trust 
Co. of Lafayette v. Murdock Realty Co., 111 Ind. App. 226, 39 N.E.2d 507 (1942);  Tevis v. 
Hammersmith, 31 Ind. App. 281, 66 N.E. 79 (1903).  This standard for excusing demand is 
known as demand futility. 
 
 
II.  The Indiana BCL Does Not Impose Universal Demand 
 
In 1985, the Indiana General Assembly created the Indiana General Corporation Law 
Study Commission to evaluate the viability of completely revising the Indiana General 
Corporation Act.  1985 Ind. Acts 2490-91.  Based on the Commission’s recommendations, the 
General Assembly passed the Indiana Business Corporation Law (“BCL”) in 1986.  1986 Ind. 
Acts 1377-1532 (current version at Ind. Code Ann. §§ 23-1-17-1 to -54-3 (West 2005)).   
                                             
 
1 Guidant is also a defendant in this suit, but only nominally.  (Plaintiff’s App. at 13.) 
 
3
 
The Commission based the BCL largely on the 1984 version of the Revised Model 
Business Corporation Act (“RMA”), a guide for state business corporation statutes published by 
the Committee on Corporate Laws of the American Bar Association’s Section on Business Law.  
Ind. Code Ann. § 23-1-17 Introduction (West 2005).   
 
The BCL’s demand provision, which has remained unchanged since its enactment, reads 
as follows: 
 
A complaint in a proceeding brought in the right of a corporation 
must be verified and allege with particularity the demand made, if 
any, to obtain action by the board of directors and either that the 
demand was refused or ignored or why the shareholder did not 
make the demand.  Whether or not a demand for action was made, 
if the corporation commences an investigation of the charges made 
in the demand or complaint (including an investigation commenced 
under section 4 of this chapter), the court may stay any proceeding 
until the investigation is completed. 
 
1986 Ind. Acts 1422 (current version at Ind. Code Ann. § 23-1-32-2 (West 2005)).  This section 
is very similar to the RMA provision on this subject, the only difference worth noting being the 
addition of the parenthetical in the second sentence.  Compare 1986 Ind. Acts 1422, with MODEL 
BUS. CORP. ACT § 7.40 (1984). 
 
The BCL reflected Indiana’s long-standing demand requirement and the fact that demand 
may sometimes be excused, but it neither explicitly enumerated nor explained in commentary 
what constitutes adequate excuse.  Some modest explanation is provided in the RMA’s 
comments, which the Commission adopted.  Ind. Code Ann. § 23-1-17 Introduction (West 2005).  
They state, “there may be circumstances showing that a demand on the board of directors would 
be useless, and in those circumstances it should be sufficient to allege the reasons why the 
plaintiff did not make the demand.”  MODEL BUS. CORP. ACT § 7.40 cmt. 1(e) (1984).  Indiana’s 
early caselaw held that a demand on a board of directors to prosecute a lawsuit against 
themselves would be a useless one.  See Wayne Pike Co., 129 Ind. at 375-78, 27 N.E. at 489-90 
(“Such a suit would be a farce . . . .”); Cole Real Estate Corp., 160 Ind. App. at 94, 310 N.E.2d at 
 
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278-79 (“Equity does not require the doing of a useless act.”).  Those who draft pleadings in 
derivative suits thus commonly name the directors so as to sustain the argument of futility.  Here, 
plaintiffs have named directors who did not participate in the challenged actions and indeed 
some directors who were not even directors at the time of the events at issue.  (Plaintiff’s App. at 
39, 45.) 
 
The Guidant directors and amicus Indiana Legal Foundation say that section 23-1-32-2 
must be read in conjunction with section 23-1-32-4, an innovation of the 1986 act that authorizes 
a corporation board to form a disinterested committee to determine whether the corporation 
should pursue a possible claim.  They contend that these two sections reflect legislative adoption 
of the “universal demand” standard, or at least a narrowing of the circumstances in which 
demands are deemed futile.  (Defs.’ Mem. Certified Question at 7-11.)  A good example of the 
universal demand standard comes from the current version of the RMA.  It requires a shareholder 
to wait ninety days after a demand is made to file suit unless “irreparable injury to the 
corporation would result.”  MODEL BUS. CORP. ACT § 7.42 (1991).  Directors and the amicus 
argue that universal demand allows a corporation to address the alleged wrong without litigation, 
to decide whether to invest in possibly costly litigation, and to control litigation if that is the 
route it chooses.  (Br. Amicus Curiae at 8.) 
 
Their contentions find support in Boland v. Engle, 113 F.3d 706, 712 (7th Cir. 1997), 
where the Seventh Circuit speculated “that the highest court in Indiana would today be persuaded 
by the general trend in the law towards narrowing, if not eliminating, the exceptions from the 
demand requirement.”  The court went on to note the growing trend of states adopting the 
universal demand standard.  Id. 
 
If anything, the national trend towards the universal demand rule has accelerated since 
the Seventh Circuit’s observation.  Boland, 113 F.3d at 712 (noting that eleven states had then 
adopted universal demand by statute).  Since Boland, eleven more states legislatures have passed 
universal demand statutes.  ARIZ. REV. STAT. ANN. § 10-742 (1996); HAW. REV. STAT. § 414-
173 (2000); IDAHO CODE ANN. § 30-1-742 (1998); IOWA CODE § 490.742 (2002); ME. REV. 
STAT. ANN. tit. 13-C, § 753 (2003); MASS. GEN. LAWS ch. 156D, § 7.42 (2004); R.I. GEN. LAWS 
 
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§ 7-1.2-711(c) (2005); S.D. CODIFIED LAWS § 47-1A-742 (2005); TEX. BUS. ORG. CODE ANN. § 
21.553 (2006); UTAH CODE ANN. § 16-10a-740(3)(a)(ii) (2000); WYO. STAT. ANN. § 17-16-742 
(1997).2  In addition, the Pennsylvania Supreme Court adopted the universal demand rule.  
Cuker v. Mikalauskas, 692 A.2d 1042, 1048-49 (Pa. 1997).  Still, these states represent a slight 
minority on this discrete issue.   
 
We think the doctrine of futility is sufficiently implanted in the interpretation and 
operation of Indiana corporate law that we should not deem it cast aside by indirect statutory 
hint.  There have been occasions since 1986 when straightforward legislative action to adopt the 
universal demand standard could well have been taken.  In 1991, the Committee on Corporate 
Laws of the ABA Section of Business Law revised its 1984 RMA version of the demand 
provision, which had excused demand if it would be futile.  The new universal demand version 
requires a shareholder to wait ninety days after a demand is made and before filing suit unless 
“irreparable injury to the corporation would result.”  MODEL BUS. CORP. ACT § 7.42 (1991).  
Though the General Assembly has amended other parts of the BCL since 1991, it has left the 
demand statute unchanged.  See Ind. Code Ann. § 23-1-30-5 (West 2005), 1998 Ind. Acts 649-50 
(adding requirement that inspectors determining the validity of proxies shall specify information 
used to make determination); Ind. Code Ann. § 23-1-37-14 (West 2005), 1993 Ind. Acts 1970 
(specifying that a corporation may purchase liability insurance for its directors from an insurer 
owned or affiliated with that corporation). 
 
 
III.  The BCL Does, However, Redefine Futility 
 
The directors argue that section 23-1-32-4 so significantly narrows the situations where 
demand would be excused as futile, that it virtually eliminates the need for any doctrine defining 
what adequately excuses making a demand.  (Defs.’ Mem. Certified Question at 8.)  We 
conclude they are pretty close to being right about this. 
 
                                             
 
2 The years given in this list are the years the statutes became effective.  Arizona’s actually became 
effective before Boland. 
 
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Both section 23-1-32-2 and the comments to the 1984 version of the RMA express a 
preference for the board of directors to enforce a corporation’s rights.  MODEL BUS. CORP. ACT § 
7.40 cmt. 1(e) (1984).  Section 23-1-32-4 works with section 23-1-32-2 in expressing an even 
stronger preference for board management and direction by stating that “the decision whether 
and to what extent to investigate and prosecute claims . . . should in most instances be subject to 
the judgment and control of the board.”  Ind. Code Ann. § 23-1-32-4 cmt. (West 2005).  See also 
Boland, 113 F.3d at 712 (decision to pursue a legal right is a complicated business decision best 
made by those with “business acumen”). 
 
Section 23-1-32-4 of the BCL permits a board of directors to establish a committee of 
three or more disinterested directors or persons to determine if a corporation has a legal or 
equitable right or remedy and whether it is in the best interests of the corporation to pursue that 
right or remedy.  1986 Ind. Acts 1422.  This section of our law has no RMA counterpart.  Ind. 
Code § 23-1-32-4 & cmt.  To insure that the committee is disinterested, the BCL denies the 
board the ability to control or terminate the committee.  Ind. Code § 23-1-32-4(b).  The 
committee’s determination not to pursue a right or remedy through a derivative proceeding is 
“presumed to be conclusive against any shareholder making a demand or bringing a derivative 
proceeding with respect to such right or remedy,” unless a shareholder can prove the committee 
was not disinterested or there was no good faith investigation.  Ind. Code § 23-1-32-4(c).  In fact, 
this statute codifies the “business judgment rule” as applied to a special committee’s 
determination of whether or not pursuit of a legal claim is in the corporation’s best interest.  See 
Ind. Code § 23-1-32-4 cmt. (c) (specifically rejecting Zapata v. Maldonado, 430 A.2d 779 (Del. 
1981), to the extent that it allows a court to apply its own judgment to evaluate a committee’s 
decision). 
 
Once a corporation establishes a disinterested committee (which it can do even after a 
suit is filed without a demand according to section 23-1-32-2) demand futility is no longer an 
issue.  There is no need at that point for a court to determine if demand would be futile on 
traditional grounds, for example, such as when a majority of the board of directors have an 
interest in the transaction.  This is because the decision of the disinterested directors or other 
disinterested persons is presumed to be conclusive, except where a claimant could establish that 
 
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the committee was not disinterested or that its determination had not been made after a good 
faith investigation.  Ind. Code § 23-1-32-4(c).   
 
The Indiana study commission explicitly explained that even though the RMA did not 
provide for a disinterested committee, it believed that “defining procedures for board actions in 
this area would benefit Indiana corporations, attorneys and the courts.”  Ind. Code § 23-1-32-4 
cmt.3
 
Efforts of this sort were prompted partly by a view that derivative suits were too often 
efforts to generate fees rather than to redress a corporate wrong.  See E. Norman Veasey, Seeking 
a Safe Harbor from Judicial Scrutiny of Directors’ Business Decisions – An Analytical 
Framework for Litigation Strategy and Counseling Directors, 37 BUS. LAW. 1247, 1260 (April 
1982).  The Indiana commission’s proposal for disinterested committees was an example of a 
device to avoid “substantial expenditure of the corporate resources including executive time, 
lawyers’ fees, and other litigation expenses.”  Id.  Recent developments that improve corporate 
responsibility and accountability suggest the viability of the disinterested committee as an 
alternative to derivative suits.  The Sarbanes-Oxley Act of 2002 increased the level of legal 
supervision over a corporation’s board by ordering the Securities and Exchange Commission to 
issue rules requiring attorneys of public companies to report evidence of any breach of fiduciary 
duties to the chief legal counsel or chief executive officer, and if they do not respond 
appropriately, to the board of directors.  Sarbanes-Oxley Act of 2002 §307, 15 U.S.C.A. 7245 
(2002).  Likewise, our 2004 amendments to the Indiana Rules of Professional Conduct include 
new and substantial provisions guiding attorneys representing corporations who become aware 
of wrongdoing by corporate officers or employees.  Ind. Professional Conduct Rule 1.13. 
 
 
                                             
 
3 Our conclusion about the effect of authorizing disinterested committees seems not to affect the 
“irreparable injury” exception, which in Indiana comes from Tevis v. Hammersmith, 31 Ind. App. 281, 66 
N.E. 79 (1903).  In Tevis, the shareholder alleged that the corporation purchased iron pipe to construct a 
waterworks system.  After the corporation abandoned this purpose and the price of the pipe rose, the pipe 
was sold and the suppliers were paid.  The profits from the excess pipe were at issue, and the Court of 
Appeals held that if demand was made, the “pipe would have been shipped out of the state of Indiana 
before any action could have been brought, and thereby the purpose of the action would have been 
defeated.”  Tevis, 31 Ind. App. at 286, 66 N.E. at 81. 
 
 
8
 
Conclusion 
 
 
A shareholder may be excused under Indiana Code § 23-1-32-2 from making a demand 
on the board of directors before filing a derivative suit if such demand would be futile.  Such a 
demand is no longer futile, however, simply because the verified complaint names the members 
of the board, or because it alleges that members of the board are involved in wrongdoing.  The 
availability of the disinterested committee will bar a separate derivative action unless the 
derivative plaintiff can establish that the committee was not disinterested or that its decision was 
not undertaken after a good faith investigation. 
 
Dickson, Sullivan, Boehm, and Rucker, JJ., concur. 
 
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