Document: 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. Argued March 27, 1991. Decided May 20, Syllabus Petitioner Kamen is a shareholder of respondent Cash Equivalent Fund, Inc. (Fund), mutual fund whose investment adviser Kemper Financial Services, (KFS). The Fund registered under the Investment Company Act 1940 (ICA), which requires, inter alia, that at least 40% fund's directors be financially independent adviser, shareholders approve contract between and an dealings measure up to fiduciary standard. In shareholder's derivative action brought on behalf against KFS, alleged KFS had obtained approval investment-adviser by causing issue materially misleading proxy statement in violation ICA, she made no precomplaint demand Fund's board because doing so would have been futile. District Court granted KFS' motion dismiss ground failed plead facts excusing with sufficient particularity for purposes Federal Rule Civil Procedure 23.1. Appeals affirmed, concluding her failure make was fatal adopting as rule federal common law American Law Institute's "universal demand" rule, abolishes futility exception demand. While acknowledging courts should incorporate state when fashioning rules fill interstices private causes security laws, court held not until reply brief adverted established status Maryland, State incorporation, challenge court's power adopt universal-demand came too late considered. Held: A entertaining ICA must apply it defined incorporation. Pp. 95-109. (a) scope requirement determines can initiate corporate litigation directors' wishes. This function clearly matter substance, procedure. 23.1 speaks only adequacy pleadings cannot understood abridge, enlarge, or modify substantive right. 95-97. (b) Where gap securities laws bridged bearing allocation governing within corporation, into unless particular question inconsistent policies underlying statute. Burks v. Lasker, 441 471, 477-480, 99 1831, 1836-1838, 60 404. It immaterial advert proceedings below, since once claim properly before court, limited legal theories advanced parties but retains identify proper construction law. Having undertaken decide whether allows plaintiff forgo futile, free promulgate without identifying source this area. 97-100. (c) drew its from improper disregarded relating exception. who—the individual shareholder—has control thus relates powers corporation. States recognizing place limit upon usual initiation litigation. many States, also terminate initiated. Superimposing universal over these States' doctrine upset balance they struck proposal detatch standard reviewing require develop body review principles replicate effect doctrine, imposing very duty fashion entire sought avoid. Moreover, such project infuse decisionmaking uncertainty, any likely judicial economies associated do justify replacing corpus corporation futility. 101-107. (d) ICA. mistakenly argues allowing bring suit board's permission permits them usurp managerial oversight responsibility. embodies congressional expectation will look after interests exercising authority envisions role protecting funds conflicts interest. 107-108. 908 F.2d 1338 (CA7 1990), reversed remanded. MARSHALL, J., delivered opinion unanimous Court. Richard M. Meyer, New York City, petitioner. Michael R. Dreeben, Washington, D.C., S.E.C. amicus curiae, support petitioner special leave Joan Hall, Chicago, Ill., respondents. Justice MARSHALL 1 case calls us determine we obliging representative founded 1940, 54 Stat. 789, 15 U.S.C. § 80a-1(a) seq., even excused futile Because incorporating State's does impede Act, decline displace uniform abolishing actions. 2 * (ICA Act) establishes scheme designed regulate one aspect management companies provide so-called "mutual fund" services. Mutual pool assets shareholders. Such typically are organized underwritten same firm serves company's "investment adviser." seeks arrest potential interest inherent arrangement. See generally Daily Income Fox, 464 523, 536-541, 104 831, 838-841, 78 645 (1984); 480-481, 1838-1839, 404 (1979). §§ 80a-10(a), 80a-2(a)(19)(iii); company approved majority shareholders, 80a-15(a); standard, breach gives rise cause either Securities Exchange Commission (SEC) behalf, 80a-35(b). 3 enforce 20(a) 80a-20(a), prohibits statements.1 complaint styled company, (KFS), adviser. misrepresented character fees. App. Pet. Cert. 90a-91a. averred allegation, stated all were voted unanimously offending statement, subsequently evidenced hostility petitioner's moving dismiss. id., 92a-93a. 659 F.Supp. 1153, 1160-1163 (N.D.Ill.1987). 4 affirmed dismissal claim. 1990). Like Court, concluded case. Drawing heavily Principles Corporate Governance (Tent. Draft 8, Apr. 15, 1988), little more than generate wasteful threshold collateral merits For reason, adopted ALI's abolished. F.2d, 1344; see ALI, Governance, supra, 7.03(a)-(b), comment a.2 acknowledged Court's precedents holding laws. 1342. Nonetheless, neglected Maryland—the incorporated—the "c[ame] late" Ibid.3 5 We certiorari, 498 ----, 554, 112 561 (1990), now reverse. II 6 form "suit officers, directors, third parties." Ross Bernhard, 396 531, 534, 733, 736, 24 729 (1970). Devised equity, purpose hands means protect misfeasance malfeasance "faithless managers." Cohen Beneficial Loan Corp., 337 541, 548, 69 1221, 1226, 93 L.Ed. 1528 (1949). To prevent abuse remedy, however, equity "precondition suit" demonstrate "that itself refused proceed suitable demand, extraordinary conditions." U.S., S.Ct., 736. accommodated 23.1, states pertinent part: 7 "The [in action] shall . allege efforts, if any, obtain desires comparable and, necessary, members, reasons plaintiff's making effort." 8 But although contemplates both possibility may excused, create dimension. On face, representative's pleadings. Indeed, procedure issued pursuant Rules Enabling "abridge, enlarge right." 28 2072(b). "affor[d] opportunity exercise their reasonable business judgment 'waive right vested belief best promoted insisting right.' " 533, 836-837, quoting Corbus Alaska Treadwell Gold Mining Co., 187 455, 463, 23 157, 160, 47 256 (1903). Ordinarily, enjoys his disregard wishes." Clark, 15.2, p. 640 (1986). our view, delimiting respective "substance," "procedure." 543-544, n. 2, 842-843, (STEVENS, concurring judgment); cf. 555-557, 1229-1230 (state security-for-costs statute limits "substantive" maintain action); Hanna Plumer, 380 460, 477, 85 1136, 1147, 14 (1965) (Harlan, concurring) (rule regulates primary conduct power). Thus, order ICA,4 content defines suit. III A. 9 clear contours governed statute, necessary effectuate necessarily character. 476-477, 1836; Sola Electric Co. Jefferson 317 173, 176, 63 172, 87 165 (1942). 10 follow, wholly product own devising. Our cases indicate endeavor remedial schemes evidences distinct need nationwide standards, see, e.g. Clearfield Trust United 318 363, 366-367, 573, 574-575, 838 (1943), express provisions analogous statutory embody policy choices readily applicable hand, e.g., Boyle Technologies 487 500, 511-512, 108 2510, 2517-2518, 101 442 (1988); DelCostello Teamsters, 462 151, 169-172, 103 2281, 2293-2295, 76 476 (1983). Otherwise, indicated "incorporat[e] [state law] decision," "application [the particular] question] frustrate specific objectives programs." Kimbell Foods, Inc., 440 715, 728, 1448, 1458, 59 711 presumption incorporated particularly strong areas entered relationships rights obligations state-law standards. 728-729, 739-740, 1458-1459, 1464-1465 (commercial law); Reconstruction Finance Corp. Beaver County, 328 204, 210, 66 992, 995, 1172 (1946) (property De Sylva Ballentine, 351 570, 580-581, 974, 980, 100 1415 (1956) (borrowing family responsibility). 11 Corporation supra. disinterested possess nonfrivolous Advisers (IAA). answer question. 477-485, 1836-1841. 'Corporations,' emphasized, 'are creatures law,' font powers." Id., 478, 1837, Cort Ash, 422 66, 84, 95 2080, 2090, 45 26 (1975). discerned nothing regulatory IAA intent "federal out whole cloth." 480, 1838. Consequently, gaps statutes filled "unless la[w] permit[s] prohibited Acts, '[its] application action. .' 479, Johnson Railway Express Agency, 421 454, 465, 1716, 1722, 44 295 12 Defending reasoning Appeals, waived anything other below. disagree. When parties, rather See, Arcadia Ohio Power 415, ---, 374 (1990). disputed effectively invoked basis claim, Cf. Lamar Micou, 218, 223, 857, 859, 29 94 (1885) ("The Union, depending opinions, bound take notice, plea proof"); Bowen Johnston, 306 19, 23, 442, 444, 83 455 (1939) (same). note viewed though neither party addressed abolished law.5 13 question, then, first comes purview Burks' is, affects If so, then impedes ICA.6 B requirement—when required, excused—determine who has litigation, trouble requiring prerogative oppose it. Spiegel Buntrock, 571 A.2d 767, 773 (Del.1990). most jurisdictions, decision former ends suit, (1986), while latter subject deferential "business rule" review, Zapata Maldonado, 430 779, 784, (Del.1981). implements "the basic principle governance decisions corporation—including litigation—should shareholders." 530, 835. extent jurisdiction recognizes places Although "jurisdictions differ widely defining circumstances excused," D. DeMott, Shareholder Derivative Actions 5:03, 35 (1987), deemed participated wrongdoing, Barr Wackman, 36 N.Y.2d 371, 381, 368 N.Y.S.2d 497, 507, 329 N.E.2d 180, 188 (1975), otherwise interested challenged transactions, Aronson Lewis, 473 805, 814 (Del.1984).7 By permitting circumvent desirability "futility" incident authority. 784. 16 initiated—the concerned Burks. (but all) delegate committee 15.2.3. Some jurisdictions treat automatically entitled deference rule." Auerbach Bennett, 619, 631-633, 419 920, 927-928, 393 994, 1001-1002 Others, including Delaware, defer "demand required" case; excused" case, confirm "independence, good faith investigat[ory]" efforts authorize "own judgment" assessing committee's recommendation, 788-789; 778. inextricably issues standards doctrine's applicability." 812. 17 Under Delaware follow lead, makes later assert fact A.2d, 775. Once made, block rests solely directors. ibid. taking away withhold where law, direct contravention teachings Burks, 478-479, 1837-1838. 18 contends tied suggests, adjudicating based could sever used bar of, terminate, conclusion. 1343-1344. Freed requirement, maintains, force would-be plaintiffs exhaust intracorporate remedies filing spare expense often protracted attends 19 reject analysis. Whatever reform, believe detach quantum lawmaking exceeds courts' interstitial mandate. determination outset exist. 31. proposal, obliged applied refused. example, developed elaborate set calibrates afforded being asserted plaintiff. 7.08 1988); 7.08, Comment c, 120 (noting "dra[w] distinction actions care loyalty").8 Whether adopts wholesale instead attempts devise postdemand finely tuned distinctive embodied given jurisdiction's suggestion impose "to law" 20 project, moreover, uncertainty. insofar permit futility, receipt crystal commit lies discretion. Were draw inference contemplating entitlement depend somewhere down road, speculate assess themselves incur time forming committee; indeed, stage, due unclear. dilemma especially acute proposing join claims, RCM Stanton, 928 1318, 1327-1328 (CA2 1991), practice, 4:08, 71 (1987).9 avoid precisely type disruption internal affairs counsels establishing competing federal- prerogatives Restatement (Second) Conflict Laws 302, e, 309 (1971) ("Uniform treatment officers important objective attained having liabilities those persons respect single law"). 21 Finally, overstates coupled review. Requiring cases, true, might marginally enhance prospect disputes resolved resort litigation; disables seeking accommodation files At time, proposed unlikely high costs doctrine. So long endeavors reproduce through merely shift focus circumstances, view advantages sufficiently apparent 1837. C 22 nonetheless constrained area conclude 479-480, As notes, constitutes "[t]he cornerstone ICA's effort funds." 482, 1839. undermines "watchdog" assigned 484-485, 1840-1841, empowering institute "usurp" Brief Respondent 40. argument misconceives Congress intended emphasized "loo[k] [investment company]" "exercising law." 485, 1840 (emphasis added). specifically noted purport power; functions primarily 'impos[e] controls restrictions companies.' National Assn. Dealers, 694, 705 13, 2427, 2436 486 (1975) added Court). discern give boards whole, greater actors ignores pointed out, 36(b) expressly provides adviser's duty. 1970 "rely assure fees, notwithstanding increased disinterestedness board." 540, 841. legislative background informed conclusion Fox "on of" therefore maintained hardly state-created consent frustrates broader IV 25 reaffirm teaching supra: bears erred ICA.10 Accordingly, reversed, remanded further consistent opinion. 27 ordered. Section states: "It unlawful person, use mails instrumentality interstate commerce otherwise, solicit name authorization issuer regulations [SEC] prescribe appropriate public protection investors." 80a-20(a). SEC statements comply promulgated 1934. CFR 270.20a-1(a) prohibit statements. 240.14a-9. excuse "only showing irreparable injury result." 7.03(b). did address "exigencies time" warrant dispensing 1344. sue 80a-35(b), adequate 1347-1349. After jury trial, 1350-1351. No Appeals' disposition never creates action, derivative. SEC, urges hold behalf. litigate disposed different grounds, declined 1338, 1341 petition certiorari likewise raise questions presented. supports jurisdictional, 476, 5, 1836, (1979), ordinarily raised amici, Parcel Service, Mitchell, 451 56, 60, 1559, 1562-1563, 67 732 (1981), another day. 475-476, 1835-1836 (assuming existence determining suit). mean suggest appeals unasserted discretion deny benefit favorable authorities fails local timely presentation arguments. Singleton Wulff, 428 106, 121, 96 2868, 2877, 49 826 (1976). undertakes sanction litigant deciding according truncated refrain issuing reasonably lower nonparties establish binding circuit precedent decided. controlling uniform, Hawes Oakland, 450, 827 (1882). contention unpersuasive. Hawes, articulated (along exception) collusive manufacture diversity jurisdiction. 460-461. objective, aim terms requires confer States." Smith Sperling, 354 91, 95-98, 77 1112, 1114-1116, 1205 (1957) (district "face [to] nature controversy" resolve jurisdictional diversity). Insofar aspired citizenship, survive Erie Tompkins, 304 64, 58 817, 82 1188 (1938). 1229-1231, (1949) (federal sitting action). Of course, recognized remedy 1836. respect, whatever philosophy gleaned eclipsed sum, irrelevant All (1987); 65, (Supp.1990). Only few rule. Fla.Stat.Ann. 607.07401(2) (Supp.1991); Ga.Code Ann. 14-2-742 (1989); Mich.Comp.Laws 450.1493a(a) Bar Association's Model Business 7.42(1), reprinted Bus.Law. 1241, 1244 And like spells detailed deference. 7.44, Bus.Law., 1246-1247. official commentary acknowledges "diffe[r] certain respects followed number states." Official Comment, 1250. "[i]n instances, specify theory" Allison General Motors 604 1106, 1117 (Del.1985), aff'd, 782 1026 (CA3 1985), frequently able tell uncertainty complicate decisionmaking. maintains affirm grounds sufficiency reference incorporated. Rather ourselves, remand adequately pleaded

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