Opinion
No. 1:03-cv-00955-SEB-WTL.
July 13, 2004
CERTIFICATION TO THE INDIANA SUPREME COURT
In this derivative action, Plaintiff, Kelbourne J. Ritter ("Plaintiff"), individually and derivatively on behalf of Guidant Corporation ("Guidant"), an Indiana corporation, alleges that Defendants, the Guidant Board of Directors ("Defendants"), breached their fiduciary duties to the corporation by knowingly and intentionally failing to act with due care and/or to exercise their best business judgment. Defendants have moved to dismiss this case pursuant to Federal Rules of Civil Procedure 12(b)(6) and 23.1, arguing that Plaintiff lacks standing to litigate this case because he failed to make demand on Guidant's Board of Directors as required by Indiana law. Plaintiff responds that demand would have been futile and is, therefore, excused by Indiana Code § 23-1-32-2, which allows "[a] complaint in a proceeding brought in the right of a corporation . . . to allege with particularity . . . why the shareholder did not make demand"
Pursuant to Indiana Appellate Rule 64(A), the following question is hereby respectfully certified to the Indiana Supreme Court:
1. Under Indiana Code § 23-1-32-2, regarding futility, by what legal standard should a court evaluate a shareholder's decision not to make demand to a public corporation's board of directors before filing a derivative suit?
We note that Indiana law regarding the excuse of demand on grounds of futility or uselessness is at least 30 years old and predates the passage of the Indiana Business Corporation Law ("IBCL"), Indiana Code § 23-1-32 (1986). Specifically, we inquire of the Indiana Supreme Court whether the subsequent adoption of the IBCL, including Indiana Code §§ 23-1-32-2 and -4, would cause the Court to modify or clarify its decision in Wayne Pike Co. v. Hammons, 129 Ind. 368, 376 (1891), holding that it would be a "farce" to require demand where corporate management is under the control of "the guilty parties." The official commentary to Indiana Code § 23-1-32-4, which states "that the decision whether and to what extent to investigate and prosecute corporate claims, like other questions of corporate policy and management, should in most instances be subject to the judgment and control of the board," seems to us to reflect a nationwide trend toward narrowing the circumstances under which demand is excused.
The most recent Indiana case on point is Cole Real Estate v. Peoples Bank and Trust Co., 310 N.E.2d 275, 278-79 (Ind.Ct.App. 1974) (holding that because "equity does not require the doing of a useless act," demand is excused where "the directors of th[e] corporation are acting in their own interests." The most recent, relevant Indiana Supreme Court case, Wayne Pike Co. v. Hammons, 129 Ind. 368 (1891), is over 100 years old and holds that it would be a "farce" to require demand where corporate management is under the control of "the guilty parties." The Indiana Supreme Court addressed demand futility in G N Aircraft, Inc. v. Boehm, 743 N.E.2d 227 (Ind. 2001), but Boehm dealt exclusively with closely held corporations and, thus, does not appear to answer the question at hand
We are not the first court to question what standard the Indiana Supreme Court would apply in excusing demand In Boland v. Engle, 113 F.3d 706 (7th Cir. 1997), the Seventh Circuit Court of Appeals surmised, but did not decide, that the Indiana Supreme Court would follow a growing minority of states and adopt the "universal demand" standard as stated in the Model Business Corporation Act § 7.42. Id. at 712-13. (Nineteen states, including eight since 1997, have adopted the universal demand standard.)
The universal demand standard of demand futility provides:
No shareholder may commence a derivative proceeding until:
(1) a written demand has been made upon the corporation to take suitable action; and
(2) 90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90 day period.
Model Bus. Corp. Act § 7.42 (1979).
See. Conn. Gen. Stat. § 33-722; Fla. Stat. ch. 607.07401(2); Ga. Code Ann. § 14-2-742; Mich. Comp. Laws § 450.1493a; Miss. Code Ann. § 79-4-7.42; Mont. Code Ann. § 35-1-543; Neb. Rev. Stat. § 21-2072; N.H. Rev. Stat. Ann. § 293-A:7.42; N.C. Gen. Stat. § 55-7-42; Va. Code Ann. § 13.1-672.1; Wis. Stat. § 180.0742.42; Ariz. Rev. Stat. § 10-742; Haw. Rev. Stat. § 414-173; Idaho Code § 30-1-742; Me. Rev. Stat. Ann. tit. 13-C § 753; Tex. Bus. Corp. Act. Ann. art. 5.14C; Utah Code Ann. § 16-10a-740(3); Wyo. Stat. Ann. § 17-16-742.
Our research discloses that courts in other jurisdictions vary greatly in their interpretations of the demand futility standard. Besides those states that follow the universal demand standard, other states adopt the Delaware standard for demand futility as articulated in Aronson v. Lewis, 473 A.2d 805 (Del. 1984). The Aronson court held that demand is excused where facts are alleged with particularity that create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule." Id. at 808.
States that follow Delaware's standard for demand futility include Illinois and New Jersey. In re Abbott Labs. Derivative S'holders Litig., 325 F.3d 795, 803 (7th Cir. 2003); In re Prudential Ins. Co. Derivative Litig., 282 N.J. Super. 256, 275 (N.J.Super.Ct. 1995). Because of the large number of corporations incorporated in Delaware, other states tend to view Delaware law as persuasive authority. See Boland, 113 F.3d at 712.
The Aronson court explained that its holding can be applied as a two-pronged test to establish demand futility. Demand futility is established if the alleged facts raise a reasonable doubt that either 1) the directors are disinterested or independent or 2) the challenged transaction was the product of a valid exercise of the directors' business judgment. 473 A.2d at 814.
The Clerk of this court is directed to forward this entry to the Clerk of the Indiana Supreme Court, along with a certified copy of the following: 1) the docket sheet for this case; 2) the verified derivative complaint; and 3) the defendants' motion to dismiss.
It is so ORDERED.