Eisenberg v. Flying Tiger, Inc.

451 F.2d 267 (1971)

Facts:

P was a shareholder of D corporation. D corporation was in the process of pursing a merger and P sued to enjoin or stop the merger. His argument was there were multiple actions taken by D that would result in the dilution of his voting rights.

NY law requires that plaintiffs post a $50K bond to secure against the possibility of plaintiff losing his case against the company. If plaintiffs lose, they are responsible for paying losses associated with their suit.

P in this case refused to post the bond and argued that his suit was not derivative because he claimed his own, personal voting rights were violated. He characterizes his injury as “representative” because the injury isn’t to the company, it’s to him and his voting rights.

He argued the corporation’s merger plan involved three separate corporations, which were subsidiaries of one another. The three would merge, leaving only the subsidiary of the subsidiary as the sole surviving corporate entity. “The effect of the merger is that business operations are now confined to a wholly owned subsidiary of a holding company whose stockholders are the former stockholders of Flying Tiger.”

Issue:

Whether P’s action is a derivative action so as to require his posting of the bond.

Holding:

Reversed in favor of P.

This is a personal action rather than a derivative action. When a shareholder voting right is as issue, especially in this case where the right is at issue in the surviving corporation, the harm is that of a personal one rather than a derivative one.

“Here, however, the reorganization deprived him and other minority stockholders of any voice in the affairs of their previously existing operating company.”

There was no deprivation by the corporation as a whole – “… no monetary damages are sought, and no individuals will be liable.”

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