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, 

2
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 

4
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

5
§ 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. 

6
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 

7
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. 

9