In re Continental Illinois Securities Litigation, 82 C 4712.

Decision Date06 May 1983
Docket NumberNo. 82 C 4712.,82 C 4712.
Citation572 F. Supp. 928
PartiesIn re CONTINENTAL ILLINOIS SECURITIES LITIGATION.
CourtU.S. District Court — Northern District of Illinois

Lowell E. Sachnoff, Dean A. Dickie, William Gleeson, Barry S. Rosen, Brian D. Roche, Sachnoff, Weaver & Rubenstein, Ltd., Chicago, Ill., Richard D. Greenfield, Nicholas E. Chimicles, Robert P. Frutkin, Marcy C. Panzer, Greenfield & Chimicles, P.C., Bala-Cynwyd, Pa., Lawrence H. Eiger, Michael J. Freed, Michael Hyman, Much, Shelist, Freed, Denenberg, Ament & Eiger, P.C., Myron M. Cherry, Robert Cushman, Jr., Bruce Rose, Cherry & Flynn, Chicago, Ill., James D. Fornari, William Jarblum, Jarblum & Solomon, P.C., Paul M. Bernstein, Edward A. Grossmann, Jeffrey Klafter, Kreindler & Kreindler, Barry J. Pinkowitz, Barry J. Pinkowitz, P.C., New York City, Lawrence Walner, Lawrence Walner, Ltd., Chicago, Ill., Daniel W. Krasner, Fred Taylor Isquith, William Loeb, Wolf, Haldenstein, Adler, Freeman & Herz, New York City, for plaintiffs.

Scott J. Davis, Mayer Brown & Platt, Chicago, Ill., for Continental Ill. Corp., Continental Bank, Anderson, Perkins and Miller.

William R. Jentes, Kirkland & Ellis, Chicago, Ill., for Malott and Luerssen.

Rene A. Torrado, Jr., Reuben & Proctor, Chicago, Ill., for Baker.

J. Alan Galbraith, Williams & Connelly, Washington, D.C., for Bergman.

Gary L. Prior, McDermott, Will & Emery, Chicago, Ill., for Hlavka.

Mitchell S. Rieger, Schiff, Hardin & Waite, Chicago, Ill., for Rastetter.

Richard Levy, Stephen Novack, Eric N. Macey, Mark A. Rabinowitz, Marilyn J. Klawiter, Levy & Erens, Chicago, Ill., for Harper.

Hedlund, Hunter & Lynch, Chicago, Ill., for Redding.

Francis J. McConnell, McConnell, Ruberry & Jansen, Chicago, Ill., for Lytle.

John J. Enright, Arvey, Hodes, Costello & Berman, Chicago, Ill., for Goy.

Thomas D. Allen, Sheldon P. Migdal, Donald Flayton, Wildman, Harrold, Allen & Dixon, Chicago, Ill., for Ernst & Whinney.

DECISION ON STANDARD TO BE USED IN RULING ON MOTION TO DISMISS DERIVATIVE CLAIMS

GRADY, District Judge.

Certain defendants have moved for dismissal of some of the derivative claims on the basis that a special committee appointed by the Board of Directors of Continental Illinois Corporation ("CIC") has determined that pursuit of these claims would not be in the best interest of the corporation. Awaiting resolution by the court is the question of what weight and effect is to be given these determinations of the Special Committee. Defendants argue that the court is limited to an examination of whether the committee was independent, whether it acted in good faith, and whether it made a reasonable investigation. Plaintiffs, on the other hand, argue that the court should go beyond this and make an independent inquiry into the factual bases for the committee's recommendation. The parties agree that the law of Delaware governs and that the controlling case is Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.1981). The parties offer conflicting views as to what the case holds.

Defendants' argument is based on the proposition that the instant case is a "demand required" situation. Defendants apparently concede that the court must conduct some inquiry into the questions of independence, good faith and reasonable investigation, if only to determine whether the corporate decision based upon the committee recommendation was "wrongful." Zapata, 430 F.2d at 784. What separates the parties is really a dispute as to the depth of the inquiry the court should conduct.

I believe defendants have misread Zapata. While the opinion does mention the distinction between the case where a demand on the board is required and the case where the demand is excused (430 A.2d at 784), it is not the holding of Zapata that the court is barred from examining a corporate decision not to prosecute in a situation where a demand is required. In fact, it does not seem to me that the demand versus no-demand discussion in Zapata has much to do with the instant case. If the plaintiffs had not made a demand upon CIC before bringing this suit, we would have to address the question whether the suit was subject to dismissal for that failure. Because shareholders' suits are brought on behalf of the corporation and not for the personal benefit of the shareholder plaintiffs, the corporation should be given the first opportunity to institute and control the suit. The way to guarantee the corporation that opportunity is to dismiss a shareholder's suit instituted without demand on the corporation to institute the suit itself. However, an exception has to be made for the situation where the directors of the corporation are themselves so connected with the alleged wrongdoing that they would be unlikely to favor the suit. In this kind of situation, a demand is said to be "futile" and is therefore excused.

The question of whether the directors have the kind of bias which should excuse a demand is, of course, one which might itself require judicial resolution in a case where a suit is filed without a demand. This, however, is not such a case. Whether plaintiffs were required to make a demand or not, they did. In Zapata, there was no demand, so the court discussed the significance of that fact. I do not interpret that discussion (430 A.2d at 784) read in the context of the entire opinion, as holding that the merits of the corporate decision are beyond judicial review in a case where a demand is not excused. So simplistic a view is inconsistent with the tenor of the court's discussion at pp. 787-789 of the opinion. For instance, the court's discussion of the possibility of a "`... there but for the grace of God go I'" attitude on the part of even innocent directors (p. 787) seems applicable to any decision on whether to bring suit against fellow directors, including the demand-required situation. The court goes on to reject the view that the "business judgment" of a committee of disinterested directors must be accepted. Describing the position of the courts which had followed this "business judgment" rule, the court stated:

The issues become solely independence, good faith and reasonable investigation. The ultimate conclusion of the committee, under that view, is not subject to judicial review. (emphasis added).

The court went on immediately to say:

We are not satisfied, however, that acceptance of the `business judgment' rationale at this stage of derivative litigation is a proper balancing point.

Id. Defendants in the instant case quote the first passage as indicating the adoption of the business-judgment rule by the Zapata court, whereas it seems clear that the court is doing precisely the opposite. The passage is introduced by the words, "As we noted, the question has been treated by other courts as one of the `business judgment' of the board committee." Id. (emphasis added). It is the rationale of those "other courts" that Zapata does not accept "at this stage of derivative...

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3 cases
  • Matter of Hunt's Health Care, Inc.
    • United States
    • U.S. Bankruptcy Court — Northern District of Indiana
    • September 28, 1993
    ... ... by the District Court in In re Continental Illinois Securities Litigation, 572 F.Supp. 931 ... ...
  • Continental Illinois Securities Litigation, Matter of
    • United States
    • U.S. Court of Appeals — Seventh Circuit
    • June 20, 1984
    ...investigation in good faith and that the bases for its conclusions were reasonable. (Step One). See Order dated May 6, 1983 pp. 5-6. 572 F.Supp. 928. If Continental met that burden then the district court would exercise " 'its own independent business judgment' in determining whether the mo......
  • Levine v. Smith
    • United States
    • United States State Supreme Court of Delaware
    • October 3, 1990
    ...Court's approval of discovery in Zapata, 430 A.2d at 788, and the federal district court's ruling in In re Continental Illinois Securities Litigation, 572 F.Supp. 928 (N.D.Ill.1983). See also Kaplan v. Wyatt, Del.Supr., 499 A.2d 1184, 1192 Levine recognizes that Zapata was a "demand excused......

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