Lexplug logoLexplug

Kamen v. Kemper Financial Services, Inc., et al.

Supreme Court of United States
500 U.S. 90 (1991)
ELI5:

Rule of Law:

In shareholder derivative actions brought under a federal statute, federal courts must incorporate the law of the state of incorporation to determine whether a pre-suit demand on the board of directors is excused as futile, unless that state law is inconsistent with the policies of the federal statute.


Facts:

  • Cash Equivalent Fund, Inc. (Fund), a registered investment company incorporated in Maryland, was managed by its investment adviser, Kemper Financial Services, Inc. (KFS).
  • Jill S. Kamen, a shareholder in the Fund, alleged that KFS secured shareholder approval of its investment-adviser contract by issuing a proxy statement that materially misrepresented KFS's fees.
  • Kamen filed a shareholder derivative suit on behalf of the Fund against KFS to challenge the proxy statement.
  • Kamen did not make a demand on the Fund's board of directors to initiate the lawsuit before filing it herself.
  • Kamen alleged that making such a demand would have been futile because all of the directors were controlled by KFS and had unanimously approved the misleading proxy statement in question.

Procedural Posture:

  • Kamen filed a shareholder derivative suit in the U.S. District Court for the Northern District of Illinois, a federal trial court.
  • The District Court granted KFS's motion to dismiss, holding that Kamen had not pleaded the facts excusing demand with sufficient particularity as required by Federal Rule of Civil Procedure 23.1.
  • Kamen (appellant) appealed to the U.S. Court of Appeals for the Seventh Circuit.
  • The Court of Appeals affirmed the dismissal on different grounds, creating and applying a uniform federal common law 'universal demand' rule that abolished the futility exception to the demand requirement.
  • The U.S. Supreme Court granted Kamen's petition for certiorari to review the Seventh Circuit's decision.

Locked

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

In a shareholder derivative action brought under the Investment Company Act of 1940, must a federal court apply a uniform federal common law rule abolishing the demand futility exception, or should it apply the demand futility law of the corporation's state of incorporation?


Opinions:

Majority - Justice Marshall

No. In a shareholder derivative suit under the Investment Company Act, federal courts should apply the demand futility law of the state of incorporation rather than fashioning a uniform federal rule. The demand requirement is a substantive rule of corporate governance that allocates power between shareholders and directors. Under the principles of Burks v. Lasker, federal courts should incorporate state law on such matters unless it conflicts with federal policy. Here, allowing a state's futility exception does not impede the purposes of the Investment Company Act. Creating a federal 'universal demand' rule would improperly require federal courts to fashion an entire body of federal corporate law and would disrupt the established expectations of corporate governance based on state law.



Analysis:

This decision solidifies the principle that state law governs the internal affairs of corporations, even when claims arise under federal statutes. By rejecting the creation of a uniform federal 'universal demand' rule, the Court prevented the federalization of a core aspect of corporate governance and reaffirmed the Burks v. Lasker framework. This provides certainty to corporations, ensuring that the rules dictating the balance of power between directors and shareholders are consistently derived from the law of the state of incorporation, avoiding a confusing dual system for state and federal claims. It leaves the evolution of the demand requirement, including the adoption of universal demand, to state legislatures and courts.

G

Gunnerbot

AI-powered case assistant

Loaded: Kamen v. Kemper Financial Services, Inc., et al. (1991)

Try: "What was the holding?" or "Explain the dissent"