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ROYSTON v. EASTERN EMPIRE CORP.
April 17, 1975
LOUIS G. ROYSTON , et al.
EASTERN EMPIRE CORPORATION , ET AL.
The opinion of the court was delivered by: HANNUM
This is a derivative action brought by four shareholders of Eastern Empire Corporation ("Eastern Empire") against 32 individuals and corporate defendants.
In a 37 page complaint devoid of clarity and precision the plaintiffs charge the defendants with various violations of the federal securities laws,
as well as numerous state law claims
which they seek to have considered pendent
to the federal violations. The Complaint alleges that Eastern Empire sustained serious losses
as a result of the alleged illegal activity of the defendants, and seeks monetary and injunctive relief.
Presently before the Court are the motions of the defendants to dismiss the Complaint either in its entirety, or with specific regard to claims made against them individually. At least two such motions
raise a serious challenge to the standing of these plaintiffs to bring this derivative action.
(1) The plaintiff must have been a shareholder at the time of the disputed transaction.
(2) The suit must not be collusive to confer jurisdiction on the federal court.
(3) The complaint must allege with particularity the efforts of the plaintiffs to seek redress of their grievance from the directors or shareholders.
(4) The reasons for the plaintiff's : (a) failure to obtain the redress sought, or (b) failure to make the effort.
(5) Fair and adequate representation of shareholder interests.
The Court recognizes the importance of derivative actions as a safeguard against the abuses of corporate responsibility. However, the Court is equally mindful of the responsibility of the corporation, absent fraud or bad faith, to run its own affairs through its duly elected board of directors, and not to have that job done by the federal courts.
The rationale for the subsequent development of Rule 23.1 was clearly articulated by the Supreme Court in Hawes v. City of Oakland,
104 U.S. 450, 26 L. Ed. 827 (1881): ". . . before the shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes." at 460-461.
With the purpose of Rule 23.1 clearly established, the Court now proceeds to an examination of the plaintiffs' efforts to comply with its requirements. The Complaint
states the plaintiffs were shareholders at all times pertinent to this action, and the affidavit of Clarence C. McGee attached to the Complaint further attests to his stock ownership throughout the time in question.
However, the Court finds nowhere in the Complaint any allegation that the "action is not a collusive one to confer jurisdiction on a Court of the United States which it would not otherwise have."
In and of itself, the absence of such allegation is not fatal to ...
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