Beam v. Stewart

833 A.2d 961 (2003)

Facts:

  • P is a shareholder of Martha Stewart’s company and brought a suit derivatively.  P however, did not make a demand to the company’s directors.
    • P is alleging that Martha Stewart breached her fiduciary duties to the corporation by engaging in insider trading and then subsequently embarrassing the company with bad media.
  • P argues that it would be futile to make a demand to the board of directors to investigate his claim.
    • The board consists of six people: Martha Stewart; President; and four other.
    • Martha Stewart and the President were deemed as not being independent.
    • P argued that two of the directors were good friends with Martha Stewart, which made them not independent.
    • P further argued that the all members of the board faced loss of assets and personal liability.
  • The investigative committee excused the lawsuit.
  • P argues that due to all the interests the board members had in the action, the demand was futile and did not require that a demand be made.

Issue:

  • Was the pre-suit demand properly dismissed and did the P require a demand?

Holding:

  • The suit was not properly excused and the directors were sufficiently independent.
  • In evaluating the independence of an investigative committee, there will always be an interest in the outcome for board members.  They are, after all, board members.
    • To the extent that friendship is a factor in the relationship between the investigators and the board appointers, the friendship must be one that rises to a bias-creating level.
    • The court argues that the reputation of the company alone would be in jeopardy if the board publicly appointed members of an investigative committee that were known to have bias.

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