May 29, 1991
TO: BOARD OF GOVERNORS NO. 36-91
SEC RULES COMMITTEE NO. 30-91
RE: SUPREME COURT OVERTURNS DECISION IN FUND PROXY CASE
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The U.S. Supreme Court has overturned the decision of the
Court of Appeals for the Seventh Circuit that abolished the
"futility" exception to the requirement that shareholders make a
demand upon directors before proceeding with a derivative suit.
(The futility exception excuses demand where, because of bias or
otherwise, it can be shown that the board would be unwilling to
proceed with the suit directly.) The issue arose in the case of
a fund shareholder who had filed a derivative suit alleging that
the fund's proxy statement was misleading. (Kamen v. Kemper
Financial Services, Inc.) The Seventh Circuit had affirmed the
dismissal of the claim on the grounds that the plaintiff had
failed to make a demand on the directors. The Institute filed an
amicus curiae brief with the Supreme Court, urging the decision
be upheld. (See Memorandum to Board of Governors No. 14-91 and
SEC Rules Committee No. 12-91, dated February 22, 1991.)
In reversing the lower court's decision, the Supreme Court
held that the Seventh Circuit was required to defer to state law
in resolving the issue unless the state law was inconsistent with
the policies of the federal securities laws. In this case, the
Court rejected the argument that the statutory duties of
independent directors under the Investment Company Act would be
undermined by the futility exception.
A copy of the Supreme Court's decision is attached. The
case has been remanded to the lower courts. We will keep you
informed of developments.
Craig S. Tyle
Associate General Counsel
Attachment