In Re Kauffman Mutual Fund Actions. Joseph B. Kauffman

impervious ment records to serious evi- objections.

dentiary

Applying first-hand-knowledge re-

quirеment here would overburden prosecution its Government cases,

criminal admit.2

Either it could introduce evidence

identity oppor- of the entrant and of his

tunity appellant’s failure observe

report, or it could introduce alternative

evidence of this fact that would not be

subject objection. to the same In either

event, we would not be confronted with alarming specter of a criminal de- being

fendant convicted and sentenced

solely anonymous on the statement of an

person appearing Government

record. Coffin, Judge, concurred and Chief FUND MUTUAL KAUFFMAN

In re opinion. filed ACTIONS. Kauffman, Joseph Plaintiff- B. Appellant.

No. 72-1288. Appeals,

United States Court First Circuit.

Argued Jan. 1973. May 14,

Decided majority's necessary opinion, foundation Selective In footnote 3 of upon which the roll is noted that Service form No. 261 Government could place report any objection at the is taken of those avoid such as was raised who designated by producing, providing for induction. here Bickford, Bartlett, Ely,

B. Proctor, Boston, & Brown Mass.; Loomis-Sayles Inc., Freeman, T. Maurice Samuel Boston, Hoar, Hoar, Goodwin, Procter & Mass.; F. Massachusetts Daniel Philadelphia, Coleman, Jr., T. William Fеatherston, Jr., Featherston, Homans Kauffman, Pa., W. Bruce whom Klubock, Mass.; Boston, The Massa- Berger, Pittinsky, Lawrence H. David Henry Co., Inc., Guild, R. chusetts Rich- Joseph Pa., Philadelphia, Fine, M. Aaron Douglas Barrett, Danner, F. ard Pow- J., Dil- City, Kauffman, N. Atlantic B. Hall, Boston, Mass.; ers & Fund, Pioneer Coleman, Kalish, Levy Paxon, worth, & Inc., Swaim, C. Thomas Sher- Pa., were Kohn, Philadelphia, E. Harold Boston, burne, Needham, Powers & brief, appellant. Management Mass.; Corp., Pioneer Perera, H. Lawrence and Sumner T. Philip Facher, L. Carret, Jerome P. Hale Mass., Babcock, Boston, with whom Dorr, Mass.; Boston, The Putnam & briefs, following attorneys were on George Fund, The Fund Growth Putnam Fund, appellees: Inc., J. Boston William Boston, Fund, Inc., Putnam Investors Jr., Adams, & Speers, Warner Samuel Jeffrey Dodge, Boston, Swope, Palmer & Mass.; Boston, Stackpole, Man- Boston Management Mass.; Inc., Co., Putnam Vance, Inc., Co., agement Research & Werly, Gates, M. Charles Samuel E. Ste- Reg- Inc., Co., Mahony, Gael & Sanders Sehatten, Debevoise, Plimpton, ven A. Lyons Barlow, Lindsay, Bos- Hill & C. inald ton, Gates, City; & York New Van Fund, Inc., Mass.; The Colonial Towne, Inc., Shapiro, Strum & Isaac Sullivan, Weinstein, H. John Paul ‍‌‌​‌​​​‌‌​‌​‌‌‌​​‌​​​‌‌​​‌​‌​‌‌‌​‌‌​​​​​​​‌‌‌‌‌‌‍Lewis Milbank, Tweed, Hadley McCloy, & New Hoag Foley, Hoffman, & M. Christian City; Fund, Ltd., York Bullock Divi- Manage- Mass.; Eliot, Boston, Colonial Shares, Inc., Stephen Steinberg, dend R. Orr, Inc., Associates, James H. ment City; McGrath, Reavis & New York Nutter, Hally, & R. McClennen John Roger Frisch, Fund, Inc., Chemical E. Fish, Mass.; Boston, Eaton Howard & Frisch, City; & York Walsh New Calvin Fund, Balanced Stock Eaton & Howard Bullock, Ltd., Hugh Bullock, F. Eber- Lund, Burns, Fund, Erik Thomas D. Co., Williams, stadt & Francis Dis- S. Boston, Mass.; Levinson, Ea- Burns & Inc., Group, tributors Herbert R. Ander- Eaton, Howard, Inc., Charles F. ton & son, Schwartz, Marvin Richard E. Carl- Reed, Jr., Groden, John M. John F. ton, Cromwell, Sullivan York & New Groden, Withington, Cross, Bos- &Pаrk Energy City; Fund, Inc., Ralph E. Sam- Fund, Fidelity Mass.; Fidelity Inc., ton, Co., Samuel, Larry uel M. Donald C. & Inc., Fund, Inc., Capital Fund, Puritan Lavinsky, Proskauer, Rose, & Goetz Theory Fund, (formerly Inc. Dow Salem Mendelsohn, City; York Invest- New Curtin, Fund, Inc.), John J. Investment Edgar Inst., Brenner, ment Co. H. Jef- Bingham, McCarthy, Jr., Richard F. frey Burt, Porter, A. Arnold & Wash- Fidelity Mass.; Gould, Boston, Dana & Management Inc., ington, C.; Fund, D. Manhattan Co., Edward Research C. & O’Connor,Jr., Ran- Paul M. Whitman & George 2d, Hanify, Johnson Edward B. Management som, City; Tsai New York Joseph Ropes Gray, Finnegan, P. & T. Wollen, Corp., & Research W. Foster Roreg Rooney, Chaplin, M. B. Ansel Sterling, City; Shearman & New York Holt, Barzun, Gaston, Snow, Motley & Corp., State Investment Federal Street Boston, Fidelity Fund, Mass.; Trend Mintz, Fund, Inc., Cohn, Street Haskell Ryan, Drinker, Inc., & Biddle Patrick T. Cohn, Boston, Glovsky Popeo, Levin, & Pa.; Keystone Reath, Philadelphia, Cus- Manage- Mass.; Research & State Street Godfrey, Inc., Funds, todian Wilfred Cabot, Company, ment Paul C. Harold Mass.; Boston, Johnson, R. Franklin Willcox, Hubley, Herrick, M. Norman A. Carlton, Schwartz, Richard E. Marvin Smith, Farley Ketchum, Donald, Bos- & City; Cromwell, New York & Sullivan Wellington Mass.; Inc., Loomis-Sayles Fund, Inc., ton, Fund, Daniel Mutual 111.; Fund, Wellington Manage- Rosenthal, Chicago, Inc., Tech- Windsor Nath & Inc., Morgan, Supervised Co., nology Fund, L. Robert M. Investors ment Walter Buchanan, Inc., Hawkinson, Cabot, Jr., Francis Services, Charles C. John Sulli- Meyers Chicago, Mass.; Schlax, Matthias, Worcester, Boston, E. & van Affil- & Inc., Fund, Inc., Breed, 111.; Fund, Fi- Ross, iated Edward Financial ‍‌‌​‌​​​‌‌​‌​‌‌‌​​‌​​​‌‌​​‌​‌​‌‌‌​‌‌​​​​​​​‌‌‌‌‌‌‍Industrial J. Inc., Morgan, City; Her- Programs, J. & New York nancial bert, Thomas Abbott Lord, Driscoll, Gorsuch, Co., Modesitt, Kir- E. Abbett & Robert S. Leland Denver, Parsons, Jr., Dewey, gis, Grover, Campbell, A. Ballan- Judson Walker Wood, tine, Bushby, Colo.; Funds, Inc., A. New Hamilton James Palmer & City; Axe-Houghton Berge, Denver, B, Inc., Clark, Clark, York Fund Martin & Management Scudder, Colo.; Stock Hamilton Stevens & Clark Common Scudder, Covington Burling, Fund, Inc., Owen, & Clark Stevens Roberts B. Channing Shares, Fund, Washington, C.; Washington Inc., Balanced D. Mutual Channing Fund, Channing Inc., Inc., Fund, Johnston, Lemon & Growth Investors Finkelstein, Beck, Lemon, Michael H. Balanced A. James John Simon, Washing- Barrett, Smith, Schapiro Frost, Towers, Hayes Beck, New & & City; Inc., Co., ton, C.; York E. Axe Louis D. W. & T. Rowe Price Growth Stock Hyde, Jr., Scudder, Clark, Fund, Inc., K. & Rowe Price Horizons Stevens New Jr., Lyman, Gates, Inc., Stanley Friedman, Fund, T. Ronald E. Samuel J. Sher- Schatten, Debevoise, Plimp- Friedman, Goodman, eff, A. Steven Hoffman & Lyons City; Gates, ton, City; & New York New York T. Price & Asso- Rowe Jr., Tsai, Jr., Hartfield, ciates, Inc., Schaeffer, David Gerald Rowe Charles W. Case, City; Management Company, & Nation- Inc., White New York Price T. Series, Price, Pollack, Securities al Securities National Daniel Rowe A. Pollack & Series, Singer, City; National Securities Growth New Di- Stock York Investors Series, Fenlon, Emmett, Inc., Services, Thomas B. versified Sillo- F. Stuart City; Martin, way, Carnahan, Donovan, & Na- Marvin New York A. Vernon Corp., Leisure, Irvine, Phil- tional Securities & Research Newton York & New Smith, Sisk, Hughes, ip City; Fund, Inc., C. J. Robert American Mutual Wil- Reed, City; Vaughn, O’Melveny Myers, The & New York Hubbard liam W. & Fund, Inc., Dreyfus Corp., Dreyfus Angeles, The Cal.; Los The Investment Co. Jackson, Stein, Overton, America, Schuck, Ly- Howard Royall, Koegel Wells, Stuart A. M. Carl J. City; Cal.; York Prince, Angeles, Capi- & New man & Los Fund, Inc., Management Rob- Co., The One William Street tal Research Jon- Carlson, Carlson, Kwit, Roth, Lovelace, Belleville, ert Philip S. athan B. F. City; Spengler Goodell, Watkins, Cal.; Leh- Angeles, & New York Latham & Los Brothers, Hunter, Express Fund, Allan James J. man Hagan, ‍‌‌​‌​​​‌‌​‌​‌‌‌​​‌​​​‌‌​​‌​‌​‌‌‌​‌‌​​​​​​​‌‌‌‌‌‌‍Simpson, B. American Investment Bartlett, Inc., Raven, Thacher & Morrison, Robert D. Holloway, Foers- Special City; ter, Line Clark, New Yоrk The Value Clinton & San Fund, Inc., Bernhard Cal.; Situations Arnold Francisco, Express American In- Bernhard, Inc., Management Co., & Arnold United vestment Mer- Fred H. Inc., Fund, rill, Murray, Funds, McCutehen, Doyle, United Accumulative Richard Fund, Enersen, Cal.; Income Francisco, United Fund, United Science Brown & San Reed, Inc., Fund, Waddell & Joe Jack (formerly Anchor Growth Inc. Di- Valicenti, Jordan, Merriman, Inc.), Fund, Albert versified Growth D. Pine, Stock An- Leighton, Boston, Mass.; Fund, (formerly Reid chor & Income Inc. Diver- Inc., Security Shares, Fund), American Selected sified Investment Fundamental Rubin, Supervisors, Inc., Investors, Moynihan, Edward P. Edward Cornelius J. Hatton, Lynne McNown, Jr., Peabody, Storey, Brown, Rowley H. E. Jenner Block, Chicago, 111.; Stein, Boston, Mass.; & Farn- Roe Anchor R. John Inc., Stein, Haire, Pollack, Fund, ham Balanced Roe & Daniel A. Pollack & Jr., Farnham, Harry Hagey, Singer, City; Group H. Otis H. York Nеw Securi- Halleen, Levinson, Carlin, Putney, Sonnenschein, ties, Ordman, Inc., Howard F. motions, Hirson, preliminary list Twombly, York of fifteen di New Hall & groups, Inc., Mutual, into three City; vided the second Investors Investors including Inc., group Fund, a Rule 23.1 attack Investors Variable Stock plaintiff’s Inc., Carson, Fund, Ralph Payment failure make demand on M. Moseley, Nolan, directors and shareholders. district E. Frank S. Richard City. group, Wardell, court dealt lenging Davis, York with the first chal New Polk & sue, plaintiff’s capacity de COFFIN, Judge, ALD- Before Chief motions, Dreyfus nied the Kauffman v. Judges. McENTEE, Circuit RICH and Fund, Inc., D.N.J., 1969, 51 F.R.D. interlocutory appeal. but certified an Judge. ALDRICH, Senior Circuit The Third held Circuit rulings challenges appeal two This only derivatively on could sue behalf of deriva- district court the four funds in he owned which mutual tive suit on behalf of certain shares, “Kauffman funds”]. [the he is not allege is a shareholder funds which denied, maintainable of failure because 28 L.Ed.2d 323. prior de- sufficient reason excuse group Thereafter, directors, and, when a to two second mand on the attacking jurisdiction, venue, motions funds, on the shareholder. F.R.Civ.P. including process, 23.1, post.1 but not then reach We motion, pressed, Rule 23.1 the dis- issue. first trict court the antitrust severed claim in four mu is a shareholder Plaintiff (Count others, I) from the and divided funds, Dreyfus Inc., Man tual separate it into ’ten to tried in actions Fund, Inc., Fidelity Fund, Trend hattan Inc., separate July, ten In districts. the the Putnam and Growth plaintiff applied under for consolidation being, respectively, a Massa latter two 1407(a) Jаnuary, and U.S.C. § corporation a and Massachu chusetts 1972 the Judicial Panel on Multidistrict December, In business trust. setts Litigation of the ac- transferred some he in the District of New filed suit pretrial proceed- tions for consolidated only capacities Jersey in as several —not ings to the Massachusetts. District of funds, a of the but shareholder above Actions, In re Kauffman Mutual Fund also, representative of as a alia, inter F.Supp. Jud.Pan.Mult.Lit.1972, 1337. alleging shareholders of other funds— pretrial informal conference After an Company antitrust and Investment Act pretrial a or- the issued district court large against many mu causes of action govern proceedings, set- der to future funds, tual their external investment ad ting disposing of for a time schedule visers, directors affiliated with both looking toward the estab- motions and advisers, and the funds and Investment completing for of lishment a timetable Institute, Company trade the association discov- and “second-wave” “first-wave” industry. The the mutual fund brought forward, ery. then Defendants claim, of the thrust the antitrust (1) to dismiss for Rule motion 23.1 proceeding, one relevant to this plaintiff on of to make a demand failure directors, fund who were also defendant funds, (2) a directors of the Kauffman advisers, con- affiliated with investment spired dismiss, on behalf of Rule 23.1 motion funds, advisers, with others and funds, Kauffman the two Massachusetts manage- noncompetitive to set excessive plaintiff a de- to make for failure of solely ment fee оn the schedules based (3) stockholders; 23.1 mand on average net the assets of funds. April, because 1969 defense counsel submitted a motion dismiss made, not 1. this issue was the merits Moses had been While decided demand agree Burgin, Cir., and we not there raised do nom., Moses, silentio that our sub denied sub action Johnson ruling 547, a on that issue. L.Ed.2d fund, involving a no suit mutual where length representation, ject give inability the result of arm’s bar- fair and gaining”; (5) (4) the fee investment non-Kauffman funds motion management advisory services, and state or waiver dismiss for failure average being solely any the net as- upon based on which relief could claim court, fund, granted. sets of a bore no relation serv- 56 F.R.D. motions, performed though denying and ices results were the lattеr two grossly granted excessive; (6) conspiracy the two and dismissed the first funds, advisers, July 7, appeal complaint 1972. involved This being “self-dealing” cross-appeal. followed; no Investment directors, there unknown, Company Institute and others for not Relative reasons fixing and maintain- and was aimed at making upon management ing grossly excessive parts pertinent complaint, of which refraining competition; and from fees alleges margin,2 (7) “ac- and the defendants summarized all following: (1) encouraged, cooperated quiesced, have as- a demand would and (2) futile; and been unlawful combina sisted the effectuation mainte- began By conspiracy conspiracy. tion least uncontra- and nance” Jаnuary 1, 1965; (3) spring early the fund dicted affidavits submitted major- that a directors who were affiliated with it was established ity con each of the dominated and the directors of external advisers policies, personnel, and Kauffman were “affiliated” trolled funds meaning funds; (4) directors of section boards of directors within 2(a)(3) Company the advisers and Act contracts between Investment 80a-2(a)(3).3 either the sub- On funds “have been 15 U.S.C. § (k) externally man- 2. have futile.] been the members [Demand 10. aged advisers, directors of each fund investment funds, 22. all times mutual [At self-dealing with their classes and affiliated investment and have been Institute. advisers.] (a) the affiliated di- terms of the all times “The substantial afore- [At advisers] investment conspiracy and their said combination rectors re- and controlled their are to: “have dominated (a) . . funds and their fix and similar schedules of spective person- adopt . grossly management of fees un- and boards directors.” excessive policies nel, (b) by in- directors] performed “have domi- related affiliated to the services [the performance their in- the respective vestment advisers and nated and controlled managed externally and their of mutual personnel, pol- vestment advisers the funds; of directors.” icies and boards (b) times the and fee 24. all contracts [At for the prices maintain and stabilize agreements between the ad- investment by investment ad- services performed “have been ei- funds] visers and not visers adherence to said similar subject management or result of arm’s- ther fees; schedules of length bargaining between them.” competing (c) refrain from busi- management fees “cal- are] 25. [The managed ness externally of mutual solely culated on the basis of investment ad- funds or the business of average net assets.” visers. . and are improperly . meas- [. 27. “All of the defendants grossly excessive.] ured and encouraged co-operated have acquiesced, “The and conspiracy combination and and in the main- assisted effectuation in this action consisted and con- involved and continuing tenance the aforesaid combination of agreement, sist of a under- alia, standing inter of conspiracy.” аnd concert action, among: between and (a) managed of “affili- externally spoke 3. The terms each mutual affidavits at the time and its ad- ated” since the Act respective persons, fund investment at least of a of suit ; required viser 40% (b) managed be “affiliated” with externally each mutual fund’s directors not self-dealing the Act was and its the fund’s directors; fund adviser. (c) self-dealing that at least each director and his re- amended to require 40% persons, be “interested” spective investment directors not adviser; long allegations meant, 862. This has Court of these and affida- the basis 1881, Oakland, vits, v. held that stated Hawes the district court Delaware, 827, sufficiently shown the merits cited had “not U.S. L.Ed. noting allegations futility,” induce cor that the “cause of failure of his [to 80a-2(a)(9) porate presumption . be . should stat action] . § 15 U.S.C. presumed person particularity.” ed 104 U.S. at that a natural shall be with controlled, it could 26 also Jack not to and that L.Ed. 827. See Wathen be Refining Co., 1915, (ma- son not that the non-affiliated Oil & assume jority) 639-640, in their had been lax 59 L.Ed. 395. appeal to them would be duties or that complaint Rule 23.1—“The at futile. the court’s reference While allege particularity with shall also stage may presumption have to a . not . . . reasons agree erroneous,4 been making thus the em- [demand]”—is court’s result. long-standing principle, bodiment of a lawyers judges accus For and or, in a court said as Massachusetts plead tomed to the “notice” liberalized York, parallel case, N.H. Bartlett New ing Rules, F.R.Civ.P. Federal R.R., 1915, at & H. 221 Mass. background brief review of the “It is not a techni- 109 N.E. is not an or 23.1 dinary, in order. Rule 23.1 is pleading, cal rule of but one substan- exceptional plead rule of but an right.” tive the word “sub- Whether ing, serving special purpose, and re exact, it is clear that stantive” quiring judicial approach. a different “particularity” appear must Socially minority desirable stockhold may pleading itself; not stockholder thought be, may see ers’ actions general terms, hoping that, by plead in Latchman, Emerson and Shareholder otherwise, discovery he can later es- Democracy (1954); VIII Pomerantz ch. Indeed, require- tablish ease. Clark, D.Mass., F.Supp. 341, otherwise, it ment could be met normally it is the meaningless. stockholders, who conduct the affairs of Returning listing our allowed, company. Hence, to be sua (de- allegations, that, (1) ante, we find charge sponte, place himself with futile) merely a con- would be mand affording op out first the directors (dates) reason; (2) clusion, does not a status, portunity occupy their normal reason; (3) purport to state a a stockholder exceptional. that his case is must show (domination control) is, again, a initial burden His meeting fact, not of ultimate statement why demonstrate the directors are inca (4) (5) “particularity”; test doing pable duty, as the wrong- why, allegedly, are ful; the acts are it, put Court has to show that “the an nothing (3), (4) (6) over advances tagonism directory аnd the the between (7) (5); (all defendants the named corporate interest be unmis ... it individu- conspired) as names insofar Al takable.” Co. v. Delaware Hudson who are financial- bany al director-defendants Susquehanna R., R. 213 transaction, 540, 543, 435, 447, ly 29 L.Ed. 53 the attacked interested in 80a-2(a) Although presented (19), in 15 facts were § defined certain U.S.C. category. by basically affidavit, 3, ante, the mo- somewhat broader n. sufficiency, vel that the The affidavits showed five nine tion to dismiss tested presumption complaint. non, The trustees of Growth five Putnam by 80a-2(a) (9) Dreyfus, supplied five of that § of the seven directors of 15 U.S.C. presumed eight Fidelity, person and three natural shall be directors of “[a] person,” whatever of the five directors of Manhattan wеre not to be controlled meaning may trial, not unaffiliated within the Act. be its at could effect They more, complaint, plain- nothing except brief vo- reveal used to contradict employed cational information. tiff is correct that court so it.

264 go enough. group

fails to far We will tiff’s failure to make demand is classic allegations,' bootstrap. these discuss the ex- is not Domination estab- they purport by right tent that to be reasons for lished on the insistence to have making demand, plaintiff plead somewhat differ- basis for a valid suit. ently. de- the named that 2. The fact 1. An domination enough to participated is not fendants unsupported by and control, underlying upon directorate. excuse demand facts, satisfy requirement does not “control,” only Apart the affili- from particularity. minority board of each ated directors—a complaint The “acquiesced, asserts that en- to have —are manage directors affiliated with the couraged, cooperated and assisted ment advisers “dominate and control” effectuation and maintenance” directorates of funds. It is con conspiracy. directors The unaffiliated ceded, however, that each defendants, instance the even are not named as self-interested, affiliated director-de approved com- the acts who ones fendants constitute less than a York, plained N.H. v. New of. Bartlett membership of the board. 536-537, Were Mass., at R.R., H.& majority, particularity there a this is a rely plain- on N.E. 452. If we were from which a conclusion of Burgin, n.l, control tiff’s citation of Moses might Delaware, follow. anything, the fact be for at Rogers 540; 29 S.Ct. v. American not neces- directors do that unaffiliated Cir., Can 305 F.2d going pointing sarily on, know all that it, sup Without or some other again requirement par- factual up Rule 23.1’s port, see, g., e. Cathedral Estates v. Taft complaint allegation. ticularity Realty Corp., Cir., 1955, 228 F.2d alleges participated in that the “funds” ‍‌‌​‌​​​‌‌​‌​‌‌‌​​‌​​​‌‌​​‌​‌​‌‌‌​‌‌​​​​​​​‌‌‌‌‌‌‍(stock plaintiff’s corporation control of specify conspiracy, does not but defendants), conclusory interested basically impor- what manner. What pleading enough. Lucking is not See allege tant, complaint that dоes Cir., 1941, Delano, 159, 160; F.2d at those who were unaffiliated Caster, Cir., 1966, Robison viz., participated; the time of suit 924, 926-927; Dunphy v. Traveller directors who would unaffiliated Newspaper Assoc., 146 Mass. plaintiff’s have voted on 426; 16 N.E. York, Bartlett v. New one, had he made were same Mass, R.R., N.H. 534-535, H.& assertedly, impervious (and hence, ones allege spe 109 N.E. 452. Plaintiff must composed demand) the boards to a demonstrating cific facts the unmistaka question ap- when proved. contracts ble link between the unaffiliated ma jority allegedly and the affiliated and on the court to There no assumptions. burden wrongdoing minority. Baffino v. Cf. we, make such Were Bradford, 1972, D.Minn., 57 F.R.D. 79. disregard rule, to add to the com- plaint, could wonder whether we circumstance making interpolations hostility brief seeks to infer collective were not plaintiff by dwelling good his claims not in faith sustain. fact that could argu- explanation his suit has met extended made in resistance. Plaintiff’s might why Whatever effect if the ment he affiliated di- re sued value, grounds, rectors, sistance were on cannot meet substantive whatever its cf. showing Security DePinto to the ma- Provident his burden of Life Ins. as Co., Cir., 1963, jority time suit 323 F.2d of the at the cert. de board nied futile. Even 950, been S.Ct. 11 L. would have attempt capitalize respect Ed.2d to to our to were we mistaken with on which, essentially, point, he corporations circumstance that next on seeking grounds plain- particularity, there to dismiss because of his claim of corpora сolleague to the allegations that tion, and not of futil- are thus no sufficient ity circumstance, this in itself is a relating majority of the board. to a particularity, supporting the claim by Approval the directors 3. colleague’s It he is under may control. injurious cor to the to be action he would remain be assumed that de poration to excuse is not sufficient plain when the directorate votes so here mand, except circumstances Meltzer v. Atlantic tiff’s demand. See alleged. Cir., 1964, 330 F.2d Research that, further reason There is a denied nom. sub Sloan light argumenta in the the extensive L. Meltzer, 85 S.Ct. 379 U.S. us, however, feel follow, tion made that has been to Ed.2d It does not merely if could er we should with. Even we made an deal that a director who judgment there had never been in connection assume that change roneous business complement plainly of the boards act what was duty directors, those were the and that who will to do in behalf “refuse [his] ap time of suit had to corporation directors at the asked were [he] presently York, proved at of the N. transactions do Bartlett v. New H. & so.” Mass, tacked, R., mere it not follow that N.E. at H. R. making prior participation Indeed, would excuse in these to excuse demand approval mere the demand. board Where circumstances— approval corporate action, allegedly injurious corpo absent self-interest of an bias, or other indicаtion of sole lead to serious dilution rate act—would establishing the directors’ basis “wrongdoing” of Rule 23.1. excusing hence for minority stockholder, unless his A them, plaintiff’s suit should demand on face, necessari- worthless on its claim is ordinarily fact, only In be dismissed. alleges illegal ly transaction or some n.6, single post, has court, see 2 of ¶ corporation. If harmful to conduct held otherwise. merely because to excused demand is respect, In of the al- the nature participated, the same the directors leged considered. misconduct must be respect who to those could be said with Logic suggests sharp be- distinction indeed, who, oppose, or, as had failed completely tween a transactiоn undirect- merely neglected had new corporate purpose which, and one ed to a against predecessors. take action criticism, perhaps while vulnerable alleging merely error, by plaintiff’s If thought a character that could be incapa- presumed the directors are to be company. If serve the interests exercising judg- ble of sound business solely one transaction attacked was virtually ment, 23.1 would become minority, interested for the benefit of meaningless en- would be stockholder —a taking loan, trad- out a sham directors— ing merits, (viz., try on the titled to the case approv- in worthless real estate —the excessive, were that the fees establish disinterested, nominally othеr, al of the improperly at, or in violation arrived prima inexplicable. If directors is facie laws) he to show that of the antitrust colleague goes along a director with a right bring advantageous only it.5 to had a an act on its face antagonistic accept contrary It claim. the ease of to be 5. We do not Supreme Court, Sperling, in dis is true that Smith v. cussing plaintiff’s a de failure to make The sole 1 L.Ed.2d 1205. commencing mand, question raised, that all of with a relied on there approved 30-page court, opinion the contracts of the district .had However, corporation, complained ref E.Supp. 781, it made no of. was whether contracts, party, nor indispensable to the nature to be re erence as an was jurisdictional aligned party plaintiff directors. vel non of the to the interest addition, purposes that other reasons it noted found the dis when taking testimony, court, make asserted for failure to after demand. trict 266 proval acquiescence making The conduct them not, “wrongdoers” present the indi case was vis-a-vis a stockholder al- —once legitimate leges stemming funds, corporate injury undirected to a a from

vidual Apart corporate purpose. relationship. The selection of an adviser-fund adviser, compensate this, from the again, and a decision to fact that would en- corporate him, try able a obvious business for a his case on thе impro There is no merits in order mutual fund. facial to determine whether he right determining payment by bring priety it, in had a misconception a for if would abe sitting mula. A court in Boston can of the nature of unaffili- judicial self-dealing testamentary Normally by ated any take notice that directors. commonly corporate suspect. and indenture trustees are directors is Con- gress compensated recognized, however, on a formula basis. Selec that a certain formula, course, type self-dealing particular tion of in is endemic a mu- may improper, underlying fund, permitted. and the tual and must be In judgment may sufficiently business order to make sure that the directorate top-heavy, provided unsound to call for сorrection. it not be But it mini- for a does not follow that it is to be conclu mum number of directors would not who sively presumed in such a case that an be so interested. We do not believe unaffiliated, director, that, or disinterested should follow from as direc- upon him, required demand were made would be tors to be disinterested in a independent judg particular transaction, they unable exercise an differ in considering fiduciary obligations in ment what course new to their from a disin- any take.6 See Ash v. corporate International Busi terested directors other Machines, Inc., Cir., 1965, ness F. venture. All disinterested directors denied, honestly 2d according 384 U.S. must “act S. 1446, 16 judgment Ct. L.Ed.2d 531. their best for the interests of all.” Corbus Alaska Treadwell Gold exception Nor do we think that an Mining Co., 1903, 455, 463, to be made in the case of unaffiliated 157, 160, 47 L.Ed. 256. cor- When directors of a mutual fund on the porate action, inaction, subsequent- ground they expected that since are ly challenged, duty their is not extin- be sensitive to misconduct of this vari- but, rather, guished, refocused. After a ety they automatically incapacitated performing provides ap- from them with “full knowl- duties—their Plaintiff, following argument, not, fact, sup has cited authorities cited do port Communications, Jannes v. Microwave decision. Thus in Es Cathedral Inc., N.D.Ill., Realty Cir., 1955, 57 F.R.D. a Rule tates v. Taft (15 conveyance 10b-5 F.2d misrepresentatiqjn case § U.S.C. 78j (b)). by majority helpful. In We do not find it place court, finding corporation completely the first controlled them. complaint sufficient, ap Dopp said it derivative v. American Electronic Lab plied any oratories, Inc., S.D.N.Y., 1972, “the usual standard whether 55 F.R.D. complaint specific set of can be facts shown which would contained prove futility,” beyond citing allegations 57 F.R.D. at that conclusion which, turn, pur approved Fiftli Circuit decision the directors had the trans ported rely, present plaintiff as does the action. And as to the case which Conley elsewhere, Gibson, 1957, directly point, regarded court as most Wolfson, Cir., 1971, 2 L.Ed.2d U.S. ley, 78 S.Ct. 80. Con Liboff v. which dealt F.R.Civ.P. in addition to the fact that we believe authority pleading,” “notice is no Fifth for sucli Circuit confuses Rule 23.1 with interpretation pleading, specifically an im 23.1. More notice court portant, noted, p. 122, the Jannes court said even a the “defendants appellees argument strict standard “self showed interest” on conceded on oral part of all of the . a directors. of the board . similarly distinguish description ‘ownership We cannot re- [met Papilsky Berndt, S.D.N.Y., cent case of control’] as to them.” do, however, 59 F.R.D. 95. We note that

267 122; claim,” 88, Halprin 21 L.Ed.2d Estevez v. Na S.Ct. bers, Cir., 1955, edge of the basis for 324; 321, 138, 1B Babbitt, Cir., 1962, 5 219 F.2d 1 303 F.2d 141, who have Moore’s Federal Practice .405 [5]. it is for the ¶ advantage familiarity Gottlieb, with the Stoll v. 305 U.S. of “the Cf. 171-172, 104; L.Ed. have conduct- enterprise, with those who Tauro, of success or Stuhl v. 476 F.2d the record Cir. it and with ed appropriate decide on the to failure” Affirmed. Clark, response. Pomerantz the extent that F.Supp. at To Judge COFFIN, (concurring). Chief “watchdogs” they they should be are deprived given opportunity, of not judgment I concur in the of affirm- it. agreeing unsupported ance. that While desirability recognize of allegations social We of domination of a minority fide, suits. would, well founded by minority insufficient, bona a I recognize waste defect, support the tremendous We also find in but one such in not well found allegations involved that are suits defend- the ants, that named accept the dictum in do not ed. We which include mutual funds Empire Petroleum (and necessarily deHaas their of direc- boards that Cir., tors), “acquiesced, encouraged, cooperat- generally in lenient been have “[c]ourts ed and effectuation and assisted applied excusing demand” if it is conspiracy of the to estab- maintenance” allegations substantively deficient as agreements basic fee lish exorbitant easy present. remarks over Such benefiting as fund advisers thus affil- (and requirement that look the directors) directors’ to the iated detriment “antagonism be unmistaka ... funds and in violation the antitrust Albany v.Co. ble.” Delaware & Hudson I view as laws. But fatal absence plaintiff suggests, If, R. as R. in affida- an indication prosecute ability a his frustrates vits, phrasing, the court’s “that use suit, he the answer is that worthwhile the unaffiliated directors who bring entitled to it. not have voted on one, he ones had made were the same question need be reached. further No (and assertedly, hence, impervious to a however, affirming com must, composed demand) when the boards phrase upon in the order of ment one question ap- the contracts proved.” granting the motion to court district that new cannot We assume prejudice.” dismiss, that “without is unwilling unaffiliated directors would be prejudice mean This must without legality of the wisdom or reconsider of action. The the substantive cause appro- predecessors’ and, actions prejudice on the issue dismissal is with bring priate, suit. obligation a demand on to mate respect go would, however, sub not far the directors with I so complaint. principle ap delineating sharp The stantive court “the dis- does “ [although, judg excusing plies purposes tinction”, where de- 23.1, ment for defendant mand under Rule actions between thought precluded merits, the in- which to serve “could be maintaining company” of a action on terests those from a new action, precluded self-dealing he The same cause fraudulent or nature. relitigating very question not been articulated distinction has so from litigated century juris- prior suit action.” almost of derivative which was although Judgments concededly prudence, most of com Restatement § just prominent b, involved (1942). Acree v. Air cases have ment at 195 See Cir., 1968, Assoc., the lan- F.2d such situations. Yet Line factual Pilots guage denied, 199, 203, traces number cases Moreover, watchdog compass.* primary these are оb- directors”. wider exceeding ject is, patently, corporations of their are surveillance when times giantism impact and of transactions between the funds the in even size and layers investment advisers the other past, new and dimen in which when obligation being personally corporate are interested. are directors of sions recognized, scrutiny importance Their d’etre is of of raison acute and when oversight management very here contracts attacked. of directorate technocracy greater A is than ever. major contracts, additionally, are These degree higher professionalism, of sensi corporate any perspective. actions from fairly mаy tivity, scrutiny ex and be that It seems reasonable to assume thus today pected part of on directors given the directors would be advance no- simpler I am therefore in a era. than tice of at least their content and of final formula, reluctant, by to set resort meeting they at which be con- or to the action inaction boundaries significance sidered. Whatever the directors, beyond demand on them which excusing knowing demand of mere ac- always required. shall major corporate impending quiescence in settings, Liboff, if, however, in other see su- can actions Even such boundaries such, pra, accept- passive I believe that justified directors they by ance of the generаl, supposition unaffiliated directors on the that can very gears previously justify their on un- transactions which reverse a course by place the directorate suffi- once attention is refocused on would be dertaken wrong allegation cient involvement or that it constitutes a subservience an unlikely meaning- corporation, respond find the broad extension them fully Here, to unaffiliated or in- are no of “first refusals” dependent to a demand. there meetings allegations regarding mutual funds directors of singularly inappropriate. challenged would seem fees actual votes believe, court, corporate quorum unlike the that For I or rules. the relevant by directors of mutual funds unaffiliated But оne that action whether assumes higher obligation inquiry membership than majority have or total ordinary corporations, majority actually at merely directors those type present required, clearly to the of transaction under least as unaffil- some here. v. As we said Moses assault Burgin, iated directors either for the con- voted (1st 369, 445 F.2d Cir. vote, person tracts failed to or or Congress 1971), intended that these proxy, appear appropriate or “independent members act as meeting. my board view, this would be Under * Albany Sus presump- Delaware Hudson Co. tacked, a demand on them is 451, quehanna R.R., made”) ; 213 U.S. tively and need futile not be 540, 545, (1909) Machines, 53 L.Ed. 862 Ash v. International Business ques (“good 1965) . . . need not be Inc., (3d faith F.2d Cir. tionеd”) ; Copper (“the United Securities Co. allege stockholder shall Amalgamated Copper Co., corporation are that the directors of the personally 61 L.Ed. 1119 37 S.Ct. in the al involved ... (“no (1917) leged wrongdoing way in a calculated guilty impair judg . . directors . have been exercise of business whatsoever”) ; any ; corporation”) misconduct Smith v. ment on behalf of 91, 95, Sperling, Wolfson, 77 S.Ct. Liboff v. (“There (1957) (5th 1971) (the complaint, 1 L.Ed.2d held Cir. management antagonism rule”, “fully requirements whenever meet the against aligned the stockholder and de “The of said acquiesced participated, approved fends course of conduct which he at normally charge transaction”) ; Papilsky tacks. is cast said fraud, trust, illegal Berndt, 1973) (S.D.N.Y., terms or brеach of 59 F.R.D. 95 Realty ity”) ; partici Taft (allegation Cathedral Estates v. “the directors (2d 1955) pated wrongs acquiesced 228 F.2d Cir. al (“where leged” sufficient). . . . held . . . involved in the at- transaction enough demand, al- excuse had béen leged membership the unaffiliated contract-making at both same time.

and demand management fee

I also note that simply ul-

contracts are not attacked as negli- product tra vires mere

gence or “eroneous or even of “unsound” judgment”. They are

business illegal under federal antitrust If I to calibrate a scale laws. varying impact impro- measure

prieties, rate an I would such imagine high. fairly I find it hard ‍‌‌​‌​​​‌‌​‌​‌‌‌​​‌​​​‌‌​​‌​‌​‌‌‌​‌‌​​​​​​​‌‌‌‌‌‌‍to unaffiliated, director, however, participated, or under these cir-

who had knowingly acquiesced, in a

cumstances transaction, major for a albeit

purpose, suit, effec- would authorize against himself, claiming

tively the federal antitrust

transaction violated watchdogs independent can- laws. Even sign thought ready confes- not be magnitude.

sion of that INC., Appellant,

AGRASHELL, COMPANY,

HAMMONS PRODUCTS Appellee.

No. 71-1538. Appeals,

United States Court Eighth Circuit.

Submitted June

Decided March May

Rehearing 1,1973. Denied

Case Details

Case Name: In Re Kauffman Mutual Fund Actions. Joseph B. Kauffman

Court Name: Court of Appeals for the First Circuit

Date Published: May 14, 1973

Citation: 479 F.2d 257

Docket Number: 72-1288

Court Abbreviation: 1st Cir.