Source: http://openjurist.org/print/33614
Timestamp: 2015-10-09 22:20:59
Document Index: 94424209

Matched Legal Cases: ['§ 80', '§ 80', '§ 80', '§ 20', '§ 80', '§ 20', '§ 7']

500 US 90 Kamen v. Kemper Financial Services Inc
Home > 500 US 90 Kamen v. Kemper Financial Services Inc
500 US 90 Kamen v. Kemper Financial Services Inc 500 U.S. 90
111 S.Ct. 1711
114 L.Ed.2d 152
Jill S. KAMEN, Petitionerv.KEMPER FINANCIAL SERVICES, INC., et al.
No. 90-516.
* The Investment Company Act of 1940 (ICA or Act) establishes a scheme designed to regulate one aspect of the management of investment companies that provide so-called "mutual fund" services. Mutual funds pool the investment assets of individual shareholders. Such funds typically are organized and underwritten by the same firm that serves as the company's "investment adviser." The ICA seeks to arrest the potential conflicts of interest inherent in such an arrangement. See generally Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536-541, 104 S.Ct. 831, 838-841, 78 L.Ed.2d 645 (1984); Burks v. Lasker, 441 U.S. 471, 480-481, 99 S.Ct. 1831, 1838-1839, 60 L.Ed.2d 404 (1979). The Act requires, inter alia, that at least 40% of the investment company's directors be financially independent of the investment adviser, 15 U.S.C. §§ 80a-10(a), 80a-2(a)(19)(iii); that the contract between the adviser and the company be approved by a majority of the company's shareholders, § 80a-15(a); and that the dealings of the adviser with the company measure up to a fiduciary standard, the breach of which gives rise to a cause of action by either the Securities and Exchange Commission (SEC) or an individual shareholder on the company's behalf, § 80a-35(b).
Petitioner brought this suit to enforce § 20(a) of the Act, 15 U.S.C. § 80a-20(a), which prohibits materially misleading proxy statements.1 The complaint was styled as a shareholder derivative action brought on behalf of respondent Cash Equivalent Fund, Inc. (Fund), a registered investment company, against Kemper Financial Services, Inc. (KFS), the Fund's investment adviser. Petitioner alleged that KFS obtained shareholder approval of the investment-adviser contract by causing the Fund to issue a proxy statement that materially misrepresented the character of KFS' fees. See App. to Pet. for Cert. 90a-91a. Petitioner also averred that she made no precomplaint demand on the Fund's board of directors because doing so would have been futile. In support of this allegation, the complaint stated that all of the directors were under the control of KFS, that the board had voted unanimously to approve the offending proxy statement, and that the board had subsequently evidenced its hostility to petitioner's claim by moving to dismiss. See id., at 92a-93a. The District Court granted KFS' motion to dismiss on the ground that petitioner had failed to plead the facts excusing demand with sufficient particularity for purposes of Federal Rule of Civil Procedure 23.1. See 659 F.Supp. 1153, 1160-1163 (N.D.Ill.1987).
The Court of Appeals affirmed the dismissal of petitioner's § 20(a) claim. See 908 F.2d 1338 (CA7 1990). Like the District Court, the Court of Appeals concluded that petitioner's failure to make a precomplaint demand was fatal to her case. Drawing heavily on the American Law Institute's Principles of Corporate Governance (Tent. Draft No. 8, Apr. 15, 1988), the Court of Appeals concluded that the futility exception does little more than generate wasteful threshold litigation collateral to the merits of the derivative shareholder's claim. For that reason, the court adopted as a rule of federal common law the ALI's so-called "universal demand" rule, under which the futility exception is abolished. See 908 F.2d, at 1344; see also ALI, Principles of Corporate Governance, supra, § 7.03(a)-(b), and comment a.2 The court acknowledged this Court's precedents holding that courts should incorporate state law when fashioning federal common law rules to fill the interstices of private causes of action brought under federal securities laws. See 908 F.2d, at 1342. Nonetheless, because petitioner had neglected until her reply brief to advert to the established status of the futility exception under the law of Maryland—the State in which the Fund is incorporated—the court held that petitioner's challenge to the court's power to adopt the ALI's universal-demand rule "c[ame] too late" to be considered. Ibid.3
We granted certiorari, 498 U.S. ----, 111 S.Ct. 554, 112 L.Ed.2d 561 (1990), and now reverse.
The derivative form of action permits an individual shareholder to bring "suit to enforce a corporate cause of action against officers, directors, and third parties." Ross v. Bernhard, 396 U.S. 531, 534, 90 S.Ct. 733, 736, 24 L.Ed.2d 729 (1970). Devised as a suit in equity, the purpose of the derivative action was to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of "faithless directors and managers." Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548, 69 S.Ct. 1221, 1226, 93 L.Ed. 1528 (1949). To prevent abuse of this remedy, however, equity courts established as a "precondition for the suit" that the shareholder demonstrate "that the corporation itself had refused to proceed after suitable demand, unless excused by extraordinary conditions." Ross v. Bernhard, supra, 396 U.S., at 534, 90 S.Ct., at 736. This requirement is accommodated by Federal Rule of Civil Procedure 23.1, which states in pertinent part:
"The complaint [in a shareholder derivative action] shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and t