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

Facts:
Marx filed a derivative action against IBM and its board of directors without first demanding that the board initiate a lawsuit.

  • The complaint alleged that the board wasted corporate assets by awarding excessive compensation.

Issue:
Was the plaintiff excused for not first demanding that the board take action (i.e., was demand futile)?

Holding:
Yes.

Reasoning:
Business Corporation Law § 626(c) provides that in any shareholders’ derivative action, the complaint shall

(1) set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board, OR
(2) the reasons for not making such effort.

New York Standard for Demand Futility:

(1) The majority of the directors are interested in the transaction;
(2) The directors failed to inform themselves to a degree reasonably necessary about the transaction; or
(3) The directors failed to exercise their business judgment in approving the transaction.

Here, demand was excused because the directors had a self-interest in the compensation:

  • “A director who votes for a raise in directors’ compensation is always “interested” because that person will receive a personal financial benefit.”

However, the court still dismissed the claim, because plaintiff failed to show any factually based allegations of wrongdoing or waste.