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Law School Case Brief

Marx v. Akers - 88 N.Y.2d 189, 644 N.Y.S.2d 121, 666 N.E.2d 1034 (1996)

Rule:

Demand is excused because of futility when a complaint alleges with particularity that a majority of the board of directors is interested in the challenged transaction. Director interest may either be self-interest in the transaction at issue (receipt of "personal benefits"), or a loss of independence because a director with no direct interest in a transaction is "controlled" by a self-interested director. Demand is excused because of futility when a complaint alleges with particularity that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances. A director does not exempt himself from liability by failing to do more than passively rubber-stamp the decisions of the active managers. Demand is excused because of futility when a complaint alleges with particularity that the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors.

Facts:

Plaintiff Sylvia A. Marx, a shareholder in International Business Machines Corporation (IBM), filed a shareholder derivative action in New York state court against IBM and its board of directors ("Board"), including defendant John F. Akers. Marx filed the action without first demanding that the Board initiate a lawsuit. Marx alleged that Board wasted corporate assets and that the directors engaged in self-dealing by awarding excessive compensation to company executives and outside directors during a period of declining profitability. On defendants' motion, the trial court dismissed Marx's complaint for failure to state a cause of action; the appellate division affirmed. Marx appealed, by permission, to the Court of Appeals of New York.

Issue:

Did the trial court err in dismissing the action?

Answer:

No.

Conclusion:

The Court of Appeals of New York affirmed the order dismissing Marx's complaint for failure to state a cause of action, with costs. The court found that because only three directors were alleged to have received the benefit of the compensation scheme, a majority of the Board was not "interested" in it. It held that the allegations that the Board used faulty accounting procedures to calculate executive compensation levels were "conclusory allegations of wrongdoing" insufficient to excuse demand. The court noted that a director who voted for a raise in directors' compensation was always "interested" because that person received a personal financial benefit from it. Consequently, a demand was excused as to the allegations that the compensation set for outside directors was excessive. The court held, however, that the allegations that the compensation bore no relationship to duties performed or to the cost of living were insufficient as a matter of law because they lacked factually-based allegations of wrongdoing or waste which could, if true, sustain a verdict for Marx.

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