Opinion ID: 1801046
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Heading: Demand on the corporation.

Text: Authority to sue for corporate injuries ordinarily reposes in corporate management. Generally, for a stockholder to show a right to sue on behalf of the corporation, he or she must allege with some particularity remedies within the corporation have been exhausted by making sufficient demand upon the directors or other officers to sue or show sufficient reason for not doing so. Delaware & H. Co. v. Albany & S. R. Co., 213 U.S. 435, 452-453, 29 S.Ct. 540, 545, 53 L.Ed. 862, 869 (1909); Doctor v. Harrington, 196 U.S. 579, 588-589, 25 S.Ct. 355, 357-358, 49 L.Ed. 606, 610 (1905); Hawes v. Oakland, 104 U.S. 450, 460-461, 26 L.Ed. 827, 832 (1882); 13 Fletcher Cyclopedia Corporations, § 5963, pp. 360-365 (Wolf.Rev. 1970); 19 Am.Jur.2d, Corporations, § 540, pp. 76-77 (1965). In Iowa this concept presently is incorporated in a rule of civil procedure: Rule 44. Shareholder's actions. Shareholders in an incorporated or unincorporated association, who sue to enforce its rights because of its failure to do so, shall support their petition by affidavit, and allege their efforts to have the directors, trustees or other shareholders bring the action or enforce the right, or a sufficient reason for not making such effort. An expanded version of the same principle is found in rule 23.1 (formerly 23(b)), F.R. C.P. Relating to this rule the Supreme Court in Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 371, 86 S.Ct. 845, 850, 15 L.Ed.2d 807, 812-813 (1966), said: Rule 23(b) was not written in order to bar derivative suits. Unquestionably it was originally adopted and has served since in part as a means to discourage `strike suits' by people who might be interested in getting quick dollars by making charges without regard to their truth so as to coerce corporate managers to settle worthless claims in order to get rid of them. On the other hand, however, derivative suits have played a rather important role in protecting shareholders of corporations from the designing schemes and wiles of insiders who are willing to betray their company's interests in order to enrich themselves. Behind the demand rule is the rationale courts should not interfere in internal affairs of private corporations until all intracorporate remedies have been exhausted. The demand provides opportunity for directors to occupy their usual status as corporate managers and gives the corporation a chance to take control of litigation to be brought on its own behalf. 3B Moore's Federal Practice § 23.1.19, at 23.1-79-23.1-99 (2d ed. 1976); 7A Wright and Miller, Federal Practice and Procedure, § 1832, at 383-392 (1972); comment, Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168, 171-172 (1976). Federal courts divide on the question whether F.R.C.P. 23.1 should be applied rigidly. Several jurisdictions hold rule 23.1 is an exceptional rule of pleading, serving a special purpose, and does not fall within the liberalized notice pleading concept. In re Kauffman Mutual Fund Actions, 479 F.2d 257, 263 (1st Cir. 1973), cert. den., 414 U.S. 857, 94 S.Ct. 161, 38 L.Ed.2d 107 (1973); see Vernars v. Young, 539 F.2d 966, 968 (3rd Cir. 1976); Lucking v. Delano, 117 F.2d 159, 160 (6th Cir. 1941). Other courts are lenient in excusing demand, and construe liberally the stockholder's pleaded reasons for not making an effort to obtain the action from the directors. de Haas v. Empire Petroleum Company, 435 F.2d 1223, 1228 (10th Cir. 1970); Meltzer v. Atlantic Research Corporation, 330 F.2d 946, 948 (4th Cir. 1964), cert. den., 379 U.S. 841, 85 S.Ct. 78, 13 L.Ed.2d 47 (1964); In re Penn Central Securities Litigation, 367 F.Supp. 1158, 1164 (E.D.Pa. 1973). Iowa decisions indicate this court has not imposed onerous restraints in derivative actions. See Holi-Rest, Inc. v. Treloar, 217 N.W.2d 517, 523 (Iowa 1974) ([W]e observe no proposition for reversal is asserted based on Mrs. Coll's failure to make demand upon defendant as controlling director of the corporation to assert the corporate right.   Of course, defendant may have been familiar with our principle of law obviating such requirement where a demand would be a vain and useless thing.); Des Moines Bank & Trust Co. v. George M. Bechtel & Co., 243 Iowa 1007, 1083, 51 N.W.2d 174, 217 (1952) (But if such demand would be a vain and useless thing no demand is necessary, but the petition should state the reasons.); First Nat. Bank v. Fireproof S. B. Co., 199 Iowa 1285, 1294, 202 N.W. 14, 18 (1925) (Where, however, the corporation is under the control of the party charged with the wrongful diversion, such a demand, since it would be unavailing, need not be made.); Reed v. Hollingsworth, 157 Iowa 94, 106, 135 N.W. 37, 42 (1912) (But where these officers are themselves guilty of fraud and misfeasance is charged, it is apparent that demand upon them to bring suit against themselves would be a vain and useless thing, and in such cases no demand is necessary.); Schoening v. Schwenk, 112 Iowa 733, 736, 84 N.W. 916, 916 (1901) (It is doubtful, under the authorities, whether any proceeding by way of securing redress inside the corporation is necessary where it is plain that it would be futile.). These decisions do not assist us, however, in determining what must be contained in a challenged petition to meet the R.C.P. 44 requirement that stockholders must allege    sufficient reason for not making such effort. In Holi-Rest, supra, neither demand nor reason for not making it were alleged, but the issue was not raised in trial court or this court. The unusual circumstances there alleged clearly indicated demand would have been an empty formality. On this issue we are persuaded by those decisions which hold a general allegation of futility of demand is sufficient if other assertions of fact in the petition are detailed enough to demonstrate a demand would have been unavailing. See, e. g., Liboff v. Wolfson, 437 F.2d 121, 122 (5th Cir. 1971); In re Penn Central Securities Litigation, supra, 367 F.Supp. at 1164; 19 Am.Jur.2d, Corporations, § 542, pp. 78-79. At the same time, we find it difficult to understand, in absence of a race to meet a limitation statute deadline, why so many plaintiffs in derivative actions run risks and the type of challenge disclosed by this controversy when the R.C.P. 44 demand requirement may be satisfied so easily: The demand requirement also imposes little hardship on the complaining shareholders. The requirement can be satisfied by simply mailing a copy of the complaint to the board of directors advising them that unless the corporation enforces its rights, the shareholders will institute a derivative action against the alleged wrongdoer. A refusal should ordinarily have to be secured, but a failure by the directors to act within a reasonable time should suffice to satisfy the demand requirement. (footnotes omitted) Comment, Stockholder Derivative Actions, supra, 44 U.Chi.L.Rev. at 172 In the case before us, the demand issue is further complicated. The events plaintiffs complain of are alleged to have occurred in the period July, 1967, to February, 1972. GUG, it is alleged, merged into All American Delaware Corporation in 1973, at which time defendant All American Delaware Corporation assumed all of the rights and obligations of the defendant General United Group, Incorporated. Plaintiffs further alleged the Delaware corporation in turn merged into All American Life and Casualty Company. This petition was filed three years later on May 27, 1976. At that point GUG was nonexistent. Yet the petition as twice amended continued to assert demand had not been made on GUG directors because such a demand would be futile because the directors would never authorize suit against themselves. Plaintiffs' brief (page 5) capsulates their analysis of this litigation in the following manner: In succinct terms: In a derivative action Plaintiff Shidler is suing the true plaintiff, his own company, All American, to recover for All American against Wheelabrator and Schroeder for premium-bribery. Henceforward Plaintiff Shidler as a moving force will disappear from this Brief. The discussion will solely concern: All American versus Wheelabrator and Schroeder, in the matter of premium-bribery in the sale of control of GUG. This petition does not allege any demand was made on the directors of either subsequent All American corporation. It does not allege a demand would be futile, nor does it allege any reason, let alone a sufficient reason, for not making demand. See R.C.P. 44. Unlike the situation in Holi-Rest, defendant in this action raised this issue in trial court and pursues it here. Plaintiffs' brief refers to Moody's reports, and makes other factual assertions not contained in their petition, to show a minority of directors of the All American corporations were former GUG directors. We cannot take judicial notice of such matters. The petition does not allege the former GUG directors were on the All American board or controlled the All American corporations. Nor were All American directors made defendants. If, as the decisions indicate, a demand on a preceding board of the same corporation would not meet requirements of the rule, it seems obvious a pleading which does not allege any demand on the board of a successor corporation, nor any excuse for such failure, would be fatally defective. See Corey v. Independent Ice Co., 207 F. 459, 464-465 (D.Mass. 1913); 3B Moore's Federal Practice, supra, § 23.1.19, at 23.1-81-23.1-82. We hold trial court properly sustained the motion to dismiss on the ground plaintiffs' petition did not comply with R.C.P. 44.