Count 5, unlawful discrimination against Plaintiffs; Count 6, corporate waste. These claims are in this Court as a result of diversity and pendent jurisdiction. Since there is an independent basis for jurisdiction - diversity - thus, the state law claims must be considered and cannot be dismissed on the basis that the Federal securities claims are being dismissed.
Count 6 is an expressly derivative action. However, Plaintiffs allege that Counts 5 and 6 are being brought as direct and derivative claims. But their allegations sound in harm to the corporation and do not allege any wrongdoing that has not harmed the corporation; therefore, the right of action belongs to the corporation, or derivatively to its shareholders. There is no cognizable assertion of violation of a contract right of Plaintiffs or of injury to them independent of their being stockholders of the corporation. Claims of breach of fiduciary duty and of corporate waste are facially claims of injury to the corporation and clearly not individual bases for litigation. Suits challenging alleged mismanagement must be brought as derivative actions. Downey v. Vernitron Corp., 559 F. Supp. 1081, 1086, (D. Mass. 1983); Cowin v. Bresler, 239 U.S. App. D.C. 188, 741 F.2d 410, 414 (D.C. Cir. 1984).
Plaintiffs assert that their claim of unlawful discrimination alleges injury giving rise to a direct action. They fail to show how the alleged wrong constitutes a special injury distinct from the alleged harm to stockholders, such as infringement of a contract right distinct from the rights of all shareholders. See Condec Corp. v. Lunkenheimer, 230 A.2d 769 (Del. Ch. 1967). More recently a preferred stock rights plan, also allegedly aimed at entrenching management, was found to state a claim, if at all, on behalf of the corporation. Moran v. Household, Inc., 490 A.2d 1059, 1070 (Del. Ch. 1985), affirmed 500 A.2d 1346 (Delaware 1985). Thus the state law claims are derivative.
Defendants assert that Plaintiffs have failed to meet the requirements for maintaining a derivative suit under Rule 23.1 of (1) contemporaneous stock ownership; (2) presuit demand on the Board or excuse of demand; (3) adequacy of representation of the stockholders of the corporation.
Courts have set high standards for excusing presuit demand on the directors because of the policy behind the requirement of making demand: Recognition that management rests with the Board and its presumptive business judgment, and the desire for avoidance of unnecessary litigation. Cramer v. GT & E Corp., 582 F.2d 259, 274-75, (3rd Circuit 1978). Conclusory allegations of director wrongdoing will not excuse demand, nor will the mere approval of directors of purportedly injurious acts, absent self-interest or bias by the majority or the board. Lewis v. Curtis, 671 F.2d 779, 785 (3rd Circuit 1982). A bare statement that demand would be futile as the directors would be suing themselves does not excuse demand. Id.
Allegations that the directors' acts were part of an entrenchment scheme are too conclusory to satisfy the particular clarity requirement of Rule 23.1. Lewis v. Graves, 701 F.2d 245, 249 (Second Circuit 1983).
Although the standards adopted by the courts present substantial barriers to the maintenance of derivative suits, that appears to be the contemplated result. Cottle v. Hilton Hotels Corp., 635 F. Supp. 1094, 1100 (N.D.Ill. 1986). In accord with the case law on Rule 23.1, demand is not excused in the present case.
But even if demand were excused, Plaintiffs fail to meet the contemporaneous ownership requirement of Rule 23.1. The cases suggest that, in some circumstances, a "continuing wrong" or "continuing injury" will support standing for a derivative suit where the party bringing the action was not a stockholder at the time of the origin of the complaint of wrong, and where the wrongdoing continued. In Re Penn Central Transportation Co., 341 F. Supp. 845, 846, (E. D. Pa. 1972); Hoff v. Sprayregan, 52 F.R.D. 243, 247-48 (S.D.N.Y. 1971).
The better rule appears to be to apply the contemporaneous ownership requirement to prevent the purchasing of a lawsuit and ensure that the action is brought by an injured stockholder on behalf of the corporation. See Weston v. Reading Co., 445 Pa. 182, 282 A.2d 714 (1971). Long established principles of estoppel also suggest that the present Plaintiffs, who purchased their ownership (in September, 1986) with full knowledge of the alleged wrongdoing (the passage of the pension parachute in March 1986) do not have derivative standing after-the-fact. "[A] stranger to the corporation who buys stock with the knowledge of alleged wrongs may not maintain a derivative action even if the wrongs are continuing and persist past the time of his purchase." Blum v. Morgan Guaranty Trust Co., 539 F.2d 1388, 1390 (5th Circuit 1976). Accordingly, Plaintiffs have failed to meet the requirements of bringing a derivative action.
For the forgoing reasons, Joy's motion to dismiss Counts 4, 5 and 6 is granted. No counts remain. Defendants will submit an order.
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