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B.T.Z., INC. v. GROVE

October 13, 1992

B.T.Z., INC., an Illinois corporation, individually, on behalf of all others similarly situated, and derivatively on behalf of JLG INDUSTRIES, INC., a Pennsylvania corporation, Plaintiffs
v.
JOHN L. GROVE, L. DAVID BLACK, CHARLES H. DILLER, JR., PAUL K. SHOCKEY, H. LYLE DUFFEY, J. ROBERT FRIES, E. MASON HENDRICKSON, JAMES A. MEZERA, LAWRENCE G. WIGBELS, CHARLES O. WOOD, and JLG INDUSTRIES, INC., a Pennsylvania corporation, Defendants



The opinion of the court was delivered by: WILLIAM W. CALDWELL

 We are now considering defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). We will examine the motion under the well-established standard. Labov v. Lalley, 809 F.2d 220 (3d Cir. 1987). Defendant seeks dismissal on various grounds. We will discuss them seriatim.

 I. Derivative Action Demand Requirement

 A. Adequacy of the Demand

 Count I is a derivative claim brought by BTZ, Inc. ("BTZ"), an Illinois corporation that owns stock in JLG Industries, Inc. ("JLG"). BTZ seeks to enforce the rights of the corporation (JLG) against certain actions of its board of directors that BTZ claims breach the board's fiduciary duty. *fn1"

 Defendants now argue that Count I fails to satisfy Fed. R. Civ. P. 23.1 and Pennsylvania law because it does not allege that a proper demand was made on JLG board members to address plaintiff's complaints.

 Fed. R. Civ. P. 23.1 requires that plaintiffs in derivative suits "shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority . . ." This demand requirement is strictly enforced. Kamen v. Kemper Financial Services, U.S. ; 111 S. Ct. 1711; 114 L. Ed. 2d 152, 164 (1991). The federal procedural rule gives little dimension to the requirement, because its purpose in "delimiting the respective powers of the individual shareholder and of the directors to control corporate litigation clearly is a matter of 'substance,' not 'procedure.'" Id. State law of the state of incorporation, then, will fill in the contours of the demand requirement. Id. JLG is a Pennsylvania corporation. Complaint at P 4. Pa. R. Civ. P. 1506(a) is the state rule:

 (a) In an action to enforce a secondary right brought by one or more stockholders or members of a corporation or similar entity because the corporation or entity refuses or fails to enforce rights which could be asserted by it, the complaint shall set forth

 . . .

 (1) the efforts to secure enforcement by the corporation or similar entity or the reason for not making any such efforts . . .

 Courts have interpreted the Pennsylvania rule as requiring either a demand on the board of directors or an explanation of why a demand would be futile. Lewis v. Curtis, 671 F.2d 779 (3d Cir. 1982). It is clear that questions of the adequacy of demands must be answered on a case-by-case basis.

 In order to determine whether a demand is adequate, the Court must look to its purpose. Since the directors are charged with the duty and responsibility to manage corporate affairs, if misconduct has occurred, they should be given the initial opportunity to redress the wrongs unless demand is excused. 'At a minimum, a demand must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief.'

 Recchion, Westinghouse Elec. Corp. v. Kirby, 637 F.Supp. 1309, 1318-19 (W.D. Pa. 1986) quoting Allison on behalf of G.M.C. v. General Motors Corp., 604 F.Supp. 1106, 1117 (D. Del. 1985).

 An examination of BTZ's letters to JLG's board reveals some specificity. On November 18, 1991, attorney David Lee, on BTZ's behalf, wrote a two-page letter to the JLG board making specific demands that the board consider a stock purchase offer from a group of investors represented by attorney Lawrence Orbe. The board replied to the first letter on December 3, 1991, by asserting that it had refused to meet with Orbe because he would not identify his clients and because several sources had cast doubt on the Orbe proposal. Unsatisfied, BTZ followed up its "demand" letter on December 6, 1991, and December 10, 1991. We believe the purposes of the demand requirement were satisfied in part by that correspondence. BTZ gave the JLG board an opportunity to address BTZ's concerns about the proposed takeover bid by Orbe's clients. The BTZ letters fulfilled the purposes of the demand requirement in the context of the takeover. The complaint, however, also asks that we order the board to rescind the alleged "golden parachute" stock option plan. *fn2" Plaintiff has failed to demonstrate that it made such a demand on the board prior to instituting the instant action and has, therefore, not complied with § 1506(a) in that regard.

 B. Futility of the Demand

 Plaintiff argues that the inadequacy of its demand is irrelevant because a proper demand would have been ignored at any rate. Plaintiff contends that a demand would have been futile because (1) the directors' financial and family interests constitute conflicts of interest and (2) a demand would have been asking the directors to sue themselves.

 A demand may be excused if the members of the board of directors are so interested that they can not "determine fairly whether the corporate claim should be pursued." Lewis, supra, at 785. We find no allegation in the complaint that would justify an assumption that a demand would be futile because the board members were interested. Plaintiff merely asserts that board members receive some stipend for their services and that some have had business contacts with JLG. None of these allegations can overcome the strong preference for demands set forth in § 1506. Further, it is ...


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