Tuesday, August 17, 2004

Futile. In Scalisi v. Fund Asset Management, L.P., the Second Circuit discussed the proper standard for determining whether a demand on a board to bring an action would be futile in the context of a shareholder's derivative action. Since the corporation at issue was Maryland, the Court applied Maryland law, and held that a demand is to be considered futile only when (1) a demand, or a delay in awaiting a response to a demand, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule.

The plaintiff asserted that a director is independent only if he is not an "interested person" under the Investment Company Act. It claimed that since the directors were not independent under the ICA, demand on the board would have been futile. The Second Circuit noted that that view had no basis under Maryland law. As the plaintiff had not met the standard set out above, the Second Circuit affirmed the dismissal of the action by the District Court.

The decision can be found here.

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