Document: 441 U.S. 471 99 S.Ct. 1831 60 L.Ed.2d 404 Harry G. BURKS, Jr., et al., Petitioners,v.Howard M. LASKER al. No. 77-1724. Argued Jan. 17, 1979. Decided May 14, Syllabus Respondents, shareholders of an investment company registered under the Investment Company Act 1940 (ICA), brought this derivative suit in Federal District Court against several company's directors and its adviser, alleging that defendants had violated their duties ICA, Advisers (IAA), common law connection with a purchase by commercial paper another company. The five who were neither affiliated adviser nor action, acting as quorum pursuant to bylaws, concluded continuation litigation was contrary best interests moved dismiss action. Finding no evidence voted terminate acted other than independently good faith, entered summary judgment respondents. Appeals reversed, holding because disinterested have power foreclose nonfrivolous majority for breach fiduciary duties. Held: In suits violations ICA IAA, federal courts should, matter law, apply state governing authority independent discontinue extent such is consistent policies IAA. Congress did not require States, or courts, absolutely forbid director termination all actions. Pp. 475-486. (a) Assuming, without deciding, respondents implied, causes action Acts, cannot operate own force. Instead, "the overriding applicable here would, where facts required, control appropriateness redress despite provisions corporation . ." J. I. Case Co. v. Borak, 377 426, 434, 84 1555, 1560, 12 423 (emphasis added). 475-477. (b) fact scope respondents' right question does not, however, make irrelevant. Since purport be source managerial but instead functions primarily impose controls restrictions on internal management companies, IAA do displace laws powers unless permit prohibited "their application would inconsistent policy underlying cause Johnson Railway Express Agency, 421 454, 465, 95 1716, 1722, 44 295. 477-480. (c) Thus, threshold inquiry case (not determined either below) should been determine whether permitted suit; if so, next rule Acts. incorrectly implied only one which suits. Although Acts may justify some restraints upon unfettered discretion even mutual fund directors, they flat never actions involving codirectors. structure purpose indicate entrusted exercising granted them primary responsibility looking after funds' shareholders. There situations could reasonably believe call decision sue—as, example, costs outweigh any potential recovery. cases, it allow suit, though frivolous. 480-485. 567 F.2d 1208, reversed remanded. Daniel A. Pollack, Pikesville, Md., petitioners. Ralph C. Ferrara Securities Exchange Commission, Washington, D. C., amicus curiae, special leave Court. Joseph H. Einstein, New York City, Mr. Justice BRENNAN delivered opinion 1 presented stockholders' 1940, 15 U.S.C. § 80a-1 seq.; 80b-1 seq. To decide question, we must appropriate roles controversy. 2 shareholders, Fundamental Investors, Inc., Act, February 1973 Southern York. members board Anchor Corp. complaint alleged (ICA),1 (IAA),2 1969 $20 million Penn Central Transportation paper.3 response Fundamental's adviser4 what position take case. On basis outside counsel's recommendation investigation, five, 3 held so-called "business rule," truly has faith conclude interests. F.Supp. 1172 (1975). After permitting discovery directors' independence, respondents, finding faith. 426 844 (1977). Second Circuit 1212 (CA2 1978), consequence "disinterested duties." We certiorari, 439 816, 75, 58 106 (1978). reverse. 4 * A fundamental issue law—state federal—governs corporation's suit. first step making determination ascertain creates plaintiffs. Neither IAA—the plaintiff's two claims—expressly private violation sections relevant here. However, precedent, below assumed existed each Act. Brown Bullock, 194 207, 222-228 (SDNY), aff'd, 294 415 1961) (en banc) (ICA); Abrahamson Fleschner, 568 862 1977) (IAA); Bolger Laventhol, Krekstein, Horwath & Horwath, 381 260 (SDNY1974) (IAA). also sanctioned bringing form, apparently assuming that, 432, (1964), "[t]o hold are within sweep [right] tantamount denial relief." As petitioners disputed existence private, agree put issue, Brief Petitioners 28; Respondents 15, shall assume deciding IAA.5 5 proceed premise clear "our controlled Erie R. Tompkins, 304 64 [58 817, 82 L.Ed. 1188]," Sola Electric Jefferson Co., 317 173, 176, 63 172, 174, 87 165 (1942). See Board Comm'rs United 308 343, 349-350, 285, 287-288, 313 (1939); Deitrick Greaney, 309 190, 200, 480, 484, 694 (1940); Wright, Courts 284 (3d ed. 1976); Mishkin, Variousness "Federal Law": Competence Discretion Choice National State Rules Decision, 105 U.Pa.L.Rev. 797, 799-800 (1957); Hart, Relations Between Law, 54 Colum.L.Rev. 489, 529 (1954); L. Loss, Regulation 971 (2d 1961). Rather, "[w]hen statute condemns act unlawful nature legal consequences condemnation, left judicial determination, nevertheless questions, answers derived from adopted." supra, U.S., at S.Ct., 174. Tunstall Locomotive Firemen Enginemen, 323 210, 213, 65 235, 237, 89 187 (1944); supra. Cf. States Kimbell Foods, 440 715, 726-727, 1448, 1457-1458, 59 711 (1979); Butner 48, 914, 136 (1979). Legal rules impact significantly effectuation rights must, therefore, treated raising questions. Robertson Wegmann, 436 584, 588, 98 1991, 1994, 56 554 (1978) (statute limitations); Auto Workers Hoosier Corp., 383 696, 701, 86 1107, 1110, 16 192 (1966) (same); 435, 1561 (security expenses statute); 173 (rules estoppel); 484 (affirmative defense claim). generally Friendly, Praise Erie—and Common 39 N.Y.U.L.Rev. 383, 408 (1964); Hill, Procedural Law Nondiversity Litigation, 69 Harv.L.Rev. 66, 92-93 (1955). II 6 [respondents'] is, course, question" De Sylva Ballentine, 351 570, 580, 76 974, 980, 100 1415 (1956). 727-728, 1458. It true certain areas statutes authorize fashion complete body law. Textile Lincoln Mills, 353 448, 451, 456-457, 77 912, 915, 917-918, 972 (1957). Corporation area. 7 enforce claim behalf corporation. Note, Demand Standing Requirements Stockholder Derivative Actions, U.Chi.L.Rev. 168 (1976). This involves authorized claims pursued behalf. said past, place look corporate State's Santa Fe Industries, Inc. Green, 430 462, 479, 97 1292, 1303, 51 480 (1977); Cort Ash, 422 84, 2080, 2091, 45 26 "Corporations creatures law," ibid., font powers. By contrast, area largely regulatory prohibitory nature—it often limits exercise directorial power, rarely it. Price Gurney, 324 100, 107, 513, 516, 776 (1945). short, field congressional legislation enacted background existing law; indicated entire corpus replaced simply based statute. supra; Copper Amalgamated 244 261, 264, 37 509, 510, 61 1119 (1917). Yazell, 382 341, 352-353, 500, 506-507, (state family law); 979 P. Bator, Shapiro Wechsler, System 470-471 (1973 ed.). 8 regulation companies advisers fundamentally different respect. Mutual funds, like corporations, incorporated state, federal, found significant "nothing regulating suggests stockholders ," F.2d, 1210, silence expected. power; rather, "impos[e] companies." Assn. Dealers, 694, 705 n. 13, 2427, 2436 486 (1975) 9 295 (1975).6 590, 1995; 706-707, 1113-1114; 173. "[a] considered 'inconsistent' merely plaintiff lose litigation," 593, 1997, ever vigilant insure poses "no threat identifiable interest Wallis Pan American Petroleum 384 63, 68, 1301, 1304, 369 (1966). 702, 1111. Western Alabama, 338 294, 298, 70 105, 94 (1949). And, means "unreasonable," 70, 1305, "specific aberrant hostile rules," Little Lake Misere Land 412 596, 93 2389, 2398, (1973), will applied. See, e. g., Levitt Johnson, 334 815, 819-820 (CA1 1964). "consistency" test guarantees "[n]othing can allowed destroy right," 350, 288, yet relieves necessity out whole cloth. III 10 foregoing indicates court If decided particularly determining action.7 And circumstance, addressed inconsistency between At least implicitly, related determination. Its terminated makes manifest view rule—whether federal—would ICA.8 disagree. 11 correctly noted, 1210-1211, concerned about abuse inherent companies. pool assets, consisting portfolio securities, belonging individual investors shares fund. Tannenbaum Zeller, 552 402, 405 1977). "[m]utual rare exception, operated employees. Most funds formed, sold, managed external organizations, [called 'investment advisers,'] separately owned operated. 13 select investments businesses. typical organized provides almost services ., cannot, practical sever relationship adviser. Therefore, forces arm's-length bargaining work industry same manner sectors economy." S.Rep.No. 91-184, p. (1969); U.S.Code Cong. Admin.News 1910, pp. 4897, 4901. 14 consequence, "[t]he fraught conflicts interest," Galfand Chestnutt 545 807, 808 1976). 5; H.R.Rep.No. 2337, 89th Cong., 2d Sess., 9, 45-46, (1966); H.R.Doc.No. 136, 77th 1st 2485-2490, 2569, 2579-2580, 2775 (1942); Hearings before Subcommittee House Committee Interstate Foreign Commerce H.R. 10065, 76th 3d 58-59 Report Trusts Companies, pt. 3, 1-49 80a-1(b) (findings declaration policy).9 Yet, while these transactions adviser,10 hardly fact, overwhelming intend absolute rule. cornerstone ICA's effort requirement 40% fund's composed directors.11 80a-10(a). originally required officers employees "affiliated persons" Stat. 806. 1970, amended strengthen further independence adding stricter "interested persons." §§ 80a-10(a), 80a-2(a)(19).12 statutorily assigns host responsibilities supervision financial auditing. They duty review approve contracts principal underwriter, 80a-15(c); appoint fill vacancies resulting assignment advisory contracts, 80a-16(b); accountants prepare Commission filings, 80a-31(a). Attention paid well do. consciously chose address conflict-of-interest problem through Act's independent-directors section, rather more drastic remedies disaffiliation advisors compulsory internalization function. SEC Public Policy Implications Growth, 147-148 incorporate into provision, proposed SEC, forced seek approval settling "insiders" target S. 3580, Sess. 33(a) Wolf Barkes, 348 994, 997 1965). when prevent cutting off suits, so expressly. Section 36(b), 1428, 80a-35(b)(2), added performs precisely function charging respect adviser's fees.13 No similar provision exists kind involved 17 Congress' structuring clear. "was designed unaffiliated role 'independent watchdogs,' " 406, "furnish check management" 10065 Commerce, 109 (1940). "watchdog" chosen preference direct behavior exemplified options adopted. Indeed, 1970 appeared person" might adequately restraining interest, turned controls, stiffening way "remedy act's deficiencies." 32-33 4927.14 Without [was] supply provide representation shareholder affairs." Id., 32; Admin. News 4927. 18 shareholders.15 47 Ford.L.Rev. 568, 580 U.Chi.L.Rev., 196. 418; Cramer General Tel. Electronics 582 259, 275 (CA3 1978). certainly paradoxical willing rely "watchdogs" protect yet, done totally muzzled.16 IV 19 today Moreover, since "[w]e grant certiorari [a law]," 51, 916, (1979), point,17 remanded proceedings opinion. States; 72, 1306. 20 Reversed 21 REHNQUIST took part consideration 22 BLACKMUN, concurring. 23 I join Court's judgment. doing, read remand free and, indeed, requires, then reading, odds absolutist taken concurring judgment, seems me situation very exist policy. foreclosed, implies be. 24 STEWART, whom POWELL joins, 25 silent thus turn implications opinion, ante, 480-481, 486, there danger conflict business decisions normally directors. sue wrongdoer made collective E. Swanson Traer, 354 114, 116, 1116, 1117, 1221; 263, 1119; McKee Rogers, Del.Ch. 81, 156 191 (1931); Rice Wheeling Dollar Savings Trust 130 N.E.2d 442 (Ohio Ct.Com.Pleas 1954); Goodwin Castleton, Wash.2d 748, 144 P.2d 725 (1944). 27 remand, recognizes accepted principle thereby empowers stockholder intended "independent watchdogs," see possible issue. 13(a)(3), 811, amended, 80a-13(a)(3), former 36, 841, 80a-35 (1964 206, 852, 80b-6. alleged, inter alia, "Anchor breached statutory, contractual relying exclusively representations Goldman, Sachs (a seller paper), investigating quality safety 270-day notes purchased Fund. defendant knew known Anchor's failure meet responsibility; fiduciaries acquiescing omissions; condition steadily worsened during period November 28, June 21, date filed reorganization; decline failed investigate paper." 844, 847 (SDNY1977). "disinterested" meaning (see 1209 1978)) provides: "No per centum persons interested company." definition 80a-2(a)(19). 12, infra. Of remaining six 1172, 1175 jurisdiction, therefore being decided. Mt. Healthy City Ed. Doyle, 429 274, 279, 572, 50 Bell Hood, 327 678, 682, 66 773, 776, 90 939 (1946). Other agreed create Moses Burgin, 445 369, 373 1971); Esplin Hirschi, 402 94, 103 (CA10 1968). Herpich Wallace, 792, 815 (CA5 1970); Taussig Wellington Fund, 472, 476 1963). Compare Greater Iowa McLendon, 378 783, 793 (CA8 1967), Brouk Managed Funds, 286 901 1961), vacated moot, 424, 878, (1962). Lewis Transamerica 575 237 (CA9), cert. sub nom. Mortgage Advisors, Lewis, 952, 348, 343 (1978); Wilson First Houston 566 1235 requires uniformity varying itself enacting declare activities extending over many difficult, impossible, effective 80a-1(a)(5). But long available statutes, enforcement obviated. real concern, uniform, applied standards necessary "prohibition [the] set naught," described text failing precluded. 1208 1978); (SDNY 1975). undertake separate analysis behind companion statute, 1977); Radmer, Duties Directors J.Corp.L. 61, 36 80a-35, 206 80b-6, imposing minimum presumably much regarding called make. 11, 1300 (1977) ("Congress establish advisers"); Capital Gains Research Bureau, 375 180, 191-192, 275, 282-283, (1963); 418-419. Under circumstances, constitute board. 80a-10(b). Title 80a-2(a)(19) defines 'interested person' person used company," "(i) company, "(ii) member immediate natural "(iii) underwriter "(iv) partner employee time beginning last fiscal years counsel "(v) broker dealer 1934 dealer, "(vi) order reason having had, material professional executive officer 80a-2(a)(2) states '[a]ffiliated company' person," 80a-2(a)(3) 'affiliated "(A) directly indirectly owning, controlling, vote, outstanding voting securities person; (B) whose owned, controlled, (C) by, with, (D) officer, director, partner, copartner, (E) thereof thereof; (F) unincorporated depositor thereof." 16(b) 1934, 154 78p(b), authorizes recover insider "short swing" profits notwithstanding sue. adjunct main argument rested 1212. While lack impartiality conclusion ICA. surely critical selection shared Appeals' codirectors concerned. although speaking statutory definition, declared second section deemed solely his 89a-2(a)(19). 80a-2(a)(9) ("A presumed subchapter"). alternative ground support below, urge Fed.Rule Civ.Proc. 23.1 prohibits That Rule "shall dismissed compromised Judge Friendly noted 23(c), those words voluntary settlements plaintiffs defendants, selling fellow plaintiffs' involuntarily court, occurred 996-997 identically worded 23.1. Wright Miller, Practice Procedure 1839, 427, (1972); 3B Moore, ¶ 23.1.24[2], App. 23.1-131 Court, parties hotly dispute content correct 36-38 35-39.

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