Document: 464 U.S. 523 104 S.Ct. 831 78 L.Ed.2d 645 DAILY INCOME FUND, INC. and Reich & Tang, Inc., Petitionersv.Martin FOX. No. 82-1200. Argued Nov. 7, 1983. Decided Jan. 18, 1984. Syllabus Respondent, a shareholder of petitioner Daily Income Fund, Inc. (Fund), an open-end diversified management investment company regulated by the Investment Company Act 1940 (Act), filed suit in Federal District Court against both Fund (R T), which provides with advice services. Respondent alleged that fees paid to R T were unreasonable, violation § 36(b) Act, imposes fiduciary duty on company's adviser "with respect receipt compensation for services" "[a]n action may be brought under this subsection [Securities Exchange] Commission, or security holder such registered behalf company" other affiliated parties. The complaint sought damages favor as well payment respondent's costs, expenses, attorney's fees. dismissed suit, finding actions are subject "demand requirement" Rule Civil Procedure 23.1—which governs "a derivative one more shareholders . enforce right corporation [when] [has] failed properly asserted it" requires bringing allege his efforts, if any, obtain desired from directors reasons failure request action—and respondent had not complied Rule. Appeals reversed. Held: 23.1 does apply 36(b), thus plaintiff case need first make demand upon before suit. Pp.527-542. (a) term "derivative action," defines scope 23.1, applies only those claimed is itself could have enforced court. This interpretation consistent earlier decisions (e.g., Hawes v. Oakland, 450, 26 L.Ed. 827, Rule's provisions derived) supported its purpose preventing improperly suing place corporation. Pp. 527-534. (b) cannot judicially company. Instead establishing corporate shareholder's sue derivatively inferred, expressly new it creates Securities Exchange Commission holders Moreover, implied 36(b). Consideration pertinent factors—the statute's legislative history purposes, identity class whose particular benefit statute was passed, existence express statutory remedies adequate serve purpose, traditional role States affording relief claimed—plainly demonstrates Congress intended unique created solely 534-541. 692 F.2d 250 (CA2 1982) affirmed. Daniel A. Pollack, New York City, petitioners. Richard M. Meyer, respondent. Justice BRENNAN delivered opinion Court. 1 question decision whether Rules board (ICA Act) recover allegedly excessive adviser. Second Circuit held requirement actions. Fox 1982). Two Courts reached contrary conclusion.1 We granted certiorari resolve conflict, --- ----, 103 1271, 75 493 (1983), now affirm. 2 * ("Fund"), company, "mutual fund," ("ICA" "Act"), 15 U.S.C. 80a-1 et seq. invests portfolio short-term money market instruments aim achieving high current income while preserving capital. Under written contract, ("R T") services exchange fee currently set at one-half percent Fund's net assets. From 1978 1981, experienced substantial growth; assets increased about $75 million $775 million. During period, T's remained same. Accordingly, annual payments rose $375,000 estimated $3,875,000 1981. 3 Alleging these United Southern York, naming defendants. that, because been continually reinvested limited number instruments, routine substantially unchanged grew. By receiving significantly higher essentially same services, had, according respondent, violated owed companies their advisers ICA. Pub.L. 91-547, Section 20, 84 Stat. 1428, 80a-35(b).2 4 Petitioners moved dismiss comply Fed.Rule Civ.Proc. ., having it. ." forth "the made he desires making effort."3 contended ICA any event, excused participated wrongdoing would hostile district court, applicable no excuse based directors' possible self-interest bias, action. 94 F.R.D. (SDNY 5 court concluded terms when " 'assert,' rule law relies." Id., 254. Relying language determined section 254-261. 261. II 6 Although asserts rights characterized "derivative," see n. 11 infra, members (emphasis added). qualifying suggests type governed claims been, but not, "asserted" "right" mentioned emphasized phrase, sensibly mean without limitation, most naturally understood referring right, least equivalent, shareholder. And, context judicial procedure, reference corporation's "failure obviously presupposes 7 understanding we expressed, variety contexts, action." In City 460, 827 (1882), instance, explained "founded existing itself, appropriate plaintiff." Similarly, Cohen Beneficial Loan Corp., 337 541, 548, 69 1221, 1226, 93 1528 (1949), stated allows stockholder "to step into shoes seek restitution own"; added "brings cause derived corporation." 549, S.Ct., 1227. Finally, Ross Bernhard, 396 531, 534, 90 733, 736, 24 729 (1970), described officers, directors, third parties" original) viewed there presented—whether Seventh Amendment confers jury action—as corporation, entitled jury. 538-539, 738-739. sum, has long See also Koster Lumbermen's Mutual Casualty Co., 330 518, 522, 67 828, 830, 91 1067 (1947); Price Gurney, 324 100, 105, 65 513, 516, 89 776 (1945); Delaware Hudson R. Co. Albany Susquehanna 213 435, 447, 29 540, 543, 53 862 (1909).4 8 origin purposes support scope. derive Court's supra. Prior Hawes, federal courts exercising equity powers commonly entertained suits minority stockholders circumstances where own behalf. U.S., 452. Dodge Woolsey, 18 How. 331, 339, 401 (1855); 7A C. Wright Miller, Practice 1821, 296 -297 (1972). emphasizing importance means "protecting frauds governing body trustees," 453, noted equitable device two kinds potential abuse. First, corporations engaged disputes citizens home state collude out-of-state diversity jurisdiction order litigate dispute courts. 452-453. Second, could, unconstrained, undermine basic principle governance corporation—including initiate litigation—should majority shareholders. id., 454-457. 9 To address problems, established prerequisites These requirements designed limit use situations which, due unjustified act permit institute conduct litigation usually belongs 460. With some additions changes wording, conditions out carried forward successive revisions rules.5 10 Some announced reduce burden diverting causes State courts, natural, lawful, forum." 452-453.6 At time, however, maintain exception usual proper party bring claim acting through 460-461. As later explained, aspect rules reflects policy "[w]hether shall is, like business questions, ordinarily matter internal left discretion absence instruction vote stockholders." Copper Amalgamated 244 261, 263, 37 509, 510, 61 1119 (1917). Corbus Alaska Treadwell Gold Mining 187 455, 463, 23 157, 160, 47 256 (1903).7 principal vindicate was, course, 460-461.8 affords opportunity exercise reasonable judgment "waive legal vested belief best interests will promoted insisting right. They regard expense enforcing furtherance general determining waive insist right." (1903). On hand, if, view "litigation appropriate, acceptance places resources including information, personnel, funds, counsel, behind suit." Note, Demand Standing Requirements Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168, 171-172 (1976) (footnote omitted). Like general, therefore, regarding assume lawsuit controlled directors.9 12 conceptual basis confirm what suggests: corporation" "failed case, must decide company.10 turn consider question. III 13 look first, statute. above, supra 526 2, terms, then, unusual differs traditionally suits. (SEC) company.11 14 nevertheless contend evaluating claim, our focus intent enacted Merrill Lynch, Pierce, Fenner Smith Curran, 456 353, 377-378, 102 1825, 1838-1839, 72 182 (1982). That discerned examining factors, statute, states claimed. Ibid.; Middlesex County Sewerage Authority National Sea Clammers Ass'n, 453 1, 13-15, 101 2615, 2622-2624, 435 (1981). California Sierra Club, 451 287, 292-293, 1775, 1778-1779, 68 (1981); Cannon University Chicago, 441 677, 99 1946, 60 560 (1979); Cort Ash, 422 66, 78, 95 2080, 2088, 45 (1975). consideration each factors plainly SEC previously noted, adopted concern abuse inherent structure companies." Burks Lasker, 471, 480, 1831, 1838, 404 (1979). Unlike corporations, typically managed pre-existing external organization known 481, 1838. Because generally supervises daily operation fund often selects persons "relationship between mutual funds fraught conflicts interest." Ibid., quoting Galfand Chestnutt 545 807, 808 1976). minimize interests, scheme regulates transactions advisers, 80a-17; limits who fund's 80a-10; contract approved fund, 80a-15. 16 years following passage enjoyed enormous growth, prompting studies effectiveness protecting investors. One report, commissioned SEC, found charged than advisers' clients further industry, even proven resistant efforts moderate compensation. Wharton School Study Funds, H.R.Rep. 2274, 87th Cong., 2d Sess., pp. 28-30, 34, 66-67 (1962). Specifically, study unaffiliated mandated "of restricted value instrument providing effective representation dealings adviser." 34. A subsequent authored compensated fixed percentage assets, rather rendered actual expenses. Public Policy Implications Growth, 89-2337, p. (1966) (hereinafter Report). grew, form produce unreasonable light economies scale realized managing larger portfolio. 94, 102. Furthermore, lawsuits challenging reasonableness largely ineffective standards employed judge 132-143. 540 12. 17 remedy perceived inadequacies submitted series proposals led 1970 Amendments Act. ultimately independent encourage greater scrutiny contracts. See, e.g., 80a-10(a) (requiring 40% "interested persons," broader category identified group "affiliated" adviser, 80a-2(a)(19)); 80a-15(c) approve contracts); supra, 482-483, 1838-1839. approval contracts alone provide complete protection Report, 128-131, 144, 146-147. proposed amending require "reasonable" 143-147. initially considered Congress, bill containing proposal empowered standard intervene similar H.R. 9510, 90th 1st Sess. 8(d) (1967); S. 1659, (1967). Representatives amicus Institute (ICI), expressed enabling fairness might essence rate-making authority. ICI alternative provided "be thereof behalf." Legislation 1967: Hearings 1659 Before Senate Committee Banking Currency, Pt. 100-101 (1967) 1967 Hearings). version finally rejected industry's suggestion authorized 3724, 8(d)(6) (1968). Instead, required refused within six months, "derivative" representative capacity. Ibid. original proposal, 22. 19 After reintroduced 91st hearings consultations industry present 2224, 20(b) (1969); 115 Cong.Rec. 13648 (1969) (Statement Sen. McIntyre). different method testing compensation." S.Rep. 91-184, (1969), U.S.Code Cong. Admin.News, 4902. "reasonableness," imposed "fiduciary duty" advisers. 5-6. "either involve breach duty." 7. previous nature eliminated, provision intervention itself. 20 short, enforceable none indications drafts strongly adopting did intend create 21 conclusion predecessor structural ensure 538. Indeed, Act's actually frustrated challenges particular, three fully litigated cases attacked law, relied uphold 132-143.12 For reason, Report proposing final directorial adviser's serious action, "such controlling encompassed 4910; 5. contrast approach aspects amendments, decided rely assure fees, notwithstanding disinterestedness board. 481-482 484, 1838-1839 1840. 146-148 (right essential; although disinterested should enhanced, "even all externally adviser-underwriter check advisory forms compensation"). choice indicates contracts, other, checks 22 Nor do identify petitioners' companies, investing public, undoubtedly especial benefit" enacted, 2088 original), 11, 36(b)'s holders, ensures name, can vindicated plaintiffs unnecessary infer "broad remedial purpose." Cf., Herman MacLean Huddleston, 683, 687, 74 548 (1983). Ass'n., 2622-2624. entirely "in private [had] already recognized courts." 378, 1839; 689. Third, parties whom contracted state, federal, law. 478, 1837. 2088. IV normal establishes procedures prevent abusing device, addressed "may asserted" contrast, indicates, SEC. It anomalous, conferring enforce. follows therefore 25 Affirmed. STEVENS, concurring judgment. 27 There petitioners represented attorney. Even former assert latter 1940, 80a-35(b)—an "derivatively" holder—in my remain clear so. 28 sometimes commencing source gives rise merely facts enable satisfied; requirement. plain makes perfectly clear; demand, particularity corporation.1 predecessors, recites ante, 529-533, rule, Court, (1882). When rule's promulgated shortly after requirement—that done Hawes. Rather operated pleadings satisfied. Thus concerns adequacy pleadings; substantive rights.2 23.1. Having effort Directors, simply pleaded made.3 complies pleading 23.1.4 Rather, implicitly unmentioned intracorporate procedural me not. 30 text inconsistent No condition sufficient warrant mention premised accord managerial prerogatives note supra; explicitly rule. recognized, acknowledges again today, stands rest unlike provisions, accorded position given "only deemed circumstances." 539-541; 1840, (1979).5 laid test relying decisionmaking embodies. 31 reason congressional rejection deference expertise enough. replete findings control 537-541; 30, (1962); 2337, 89th 128-148 (1966); 1193-1200 5-6 (1969). findings, maintained very involved challenge 32 specifically issue, precedessor passed 1968, prior filing deleted. Thus, said unaware concept, yet impose 33 meaningful efficacy authorize though Fund. Since review 80a-15, futile gesture contract.6 terminate Burks, effect delay commencement vehicle investors, since 36(b)(3) recovery incurred beginning year process advisors keep several months fees—a consequence squarely odds hence intent. 34 I find nothing supporting notion maintenance antecedent procedure. affirm reaching Weiss Temporary 928 (CA3 1982), cert. pending, 82-1592; Grossman Johnson, 674 (CA1), denied, 85, 80 provides, relevant part: "For subsection, material nature, thereof, person An enumerated concerning payments, person." 80a-35(b). goes provide, inter alia, proof defendant's misconduct unnecessary, 80a-35(b)(1), "shall circumstances," 80a-35(b)(2), period 80a-35(b)(3). full: "In unincorporated association, association it, verified (1) member time transaction complains share membership thereafter devolved him (2) collusive confer otherwise have. comparable authority and, necessary, members, effort. appears fairly adequately represent similarly situated association. compromised notice dismissal compromise manner directs." commentator consolidation of, official capacity, seeking affirmative they wrongdoers, wrongdoers." Directors Shareholders Prerequisite Suit, 73 Harv.L.Rev. 746, 748 (1960). embraced conception consolidating "two 452, referred throughout "one [is] company," 455; 457 (cases suit"). (1903) (describing limiting called appeal single compel every possess, irrespective considerations"); Black's Law Dictionary 1272 (5th ed., 1979). Shortly decided, codified Equity provided: "Every parties, founded oath, contain allegation complains, law; cognizance. secure part trustees shareholders, IX 1912, replaced 27, identical except end phrase "or effort." apparently codify old certain where, excused. (1909). 1937, restated 23(b). B.J. Moore J. Kennedy, Moore's ¶ 23.1.15[1], 23.1-10 (2d ed. 1966, comprehensive revision 23.1.01, 23.1-3. "was shares 461. second clearly meant discourage incorporation 6; 23.1-14. contrived suits, 23.1-15, "aimed being used purchased grievances." 1828, 341-342 major features decision—the "fairly association" requiring settlements—are disserve legitimate §§ 1833 3B &Par; 23.1.16[3] 23.1.24. direct 460-461, presently "complaint qualification, comment drafters 4, (SEC), appearing curiae, contends oblige demand; instead, plead compliance obligations incorporation. 1837, conclude action" 542, predicate obligation instead point lawsuit, pursue non-judicial grievance. But however desirable encouragement policy, standing alone, enough neither nor meaning Such come interpreted consistently 527-529. predecessors directed ensuring cases, raises concerns. waste. Llewellyn Queen Dairy, Md. 49, 48 A.2d 322, 326 (1946). fact able achieve results contemplated demonstrate formally distinct waste; substantively well. important enactment Congress's applied waste inadequate reported became explained: "Under ratified upset showing 'corporate waste.' put 'Shock conscience court.' improper protections arm's-length bargaining present. where[ ] marketplace forces likely operate effectively, your committee waste' unduly restrictive recommends changed." 4897, 4901. argue "by added), necessarily derivative. regard, statement 477, 1836, (1979) 1840 (referring "derivative"). mean, "on behalf" "right corporation"—a proposition confirmed action: obtained go plaintiff. (1970); 36(b)(3). respect, undeniably broad sense word. 527-528. perhaps Infra, 536-541. cited evaluated common waste, unfair unless "unconscionable" "shocking." 142. Acampora Birkland, 220 F.Supp. 527, 548-549 (D.Colo.1963); Saxe Brady, 40 Del.Ch. 474, 486, 184 602, 610 Meiselman Eberstadt, 39 563, 170 720, 723 (1961). prove gross trust. Brown Bullock, 194 207 1961), aff'd, 294 415 1961). Hearings, 117-118. interest construction Enabling "rules abridge, enlarge modify right," 2072. thrust position, enhance submission management. 263-264, 510-511, (1917); S.R., 446, (1909); 457, doubted requirement, improve governance, Walker Armco Steel 446 740, 100 1978, 64 659 (1980); Ely, Irrepressible Myth Erie, 87 693 (1974). Therefore, doubt Mississippi Publishing Murphree, 438, 445-446, 66 242, 246, 185 (1946); Sibbach Wilson 312 14, 422, 426, 85 479 (1941). lightly construed so thereby alter rights. Hanna Plumer, 380 470-471, 1136, 1143-1144, (1965). Paragraph states: "No prosecute beholden positions wrongs complained Their initiation instant prosecution hands success." Joint App. 7a-8a. reject reading leaves open. 532-533, 8. sufficiently open embarking difficult analysis engages. justified since, view, correct answer 4910. presumably believed situation shared defending contract. assumption employing attorney sides litigation.

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