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GRAFMAN v. CENTURY BROADCASTING CORP.

July 3, 1990

HOWARD GRAFMAN, personally and as a shareholder derivative action on behalf of Century Broadcasting Corporation, Plaintiff,
v.
CENTURY BROADCASTING CORPORATION, a Delaware corporation; GEORGE A. COLLIAS; ANTHONY C. KARLOS; JAMES S. SOTER; and RICHARD J. BONICK, JR., Defendants



The opinion of the court was delivered by: DUFF

 BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 Century Broadcasting Corporation, George A. Collias, Anthony C. Karlos, James S. Soter, and Richard J. Bonick, Jr., have moved to dismiss the Second Amended Complaint of Howard Grafman, pursuant to Rules 12(b)(1), 12(b)(6), and 23.1, Fed. R. Civ. Pro. Alternatively, they have moved to stay these proceedings pending the report of a Special Litigation Committee of Century on the matters raised in four counts of Grafman's complaint which are derivative claims.

 This court first discussed this action in Grafman v. Century Broadcasting Corp., 727 F. Supp. 432 (N.D.Ill. 1989). That opinion gives the general flavor of this dispute, notwithstanding Grafman's twice amending his complaint, and the court assumes familiarity with that opinion for purposes of this one. *fn1" Since his first complaint, Grafman has doubled his counts from four to eight. Counts 1, 3, 5, and 7 of the Second Amended Complaint are on behalf of Grafman himself. In Count 1, Grafman contends that the defendants violated 18 U.S.C. §§ 1962(c)-(d) (1988), which are part of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). In Count 3, Grafman alleges violations of 18 U.S.C. §§ 1962(b) and 1962(d). In Count 5, he alleges violations of 18 U.S.C. §§ 1962(a) and 1962(d). Count 7 is a state law claim for breach of fiduciary obligation. For each of these counts, in Counts 2, 4, 6 and 8, respectively, Grafman brings a mirror-image claim on behalf of Century.

 Derivative Claims

 The defendants' principal objection to Grafman's derivative claims is that Grafman has failed to comply with Rule 23.1. That rule requires a plaintiff who brings a derivative action as a shareholder of a corporation to "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and the reasons for the plaintiff's failure to obtain the action or for not making the effort." Grafman acknowledges that this rule applies to his derivative claims. That is why he alleged this in each of them:

 
Grafman has, since August 31, 1987 and continuing to the present time, urged the directors of Century . . . not to take the actions of which he has been aware, which are complained of herein . . . . Notwithstanding these requests and demands, Century has taken no action to correct or remedy the wrongful acts. Because Collias and Karlos, who are continuing to benefit from the fraud alleged herein, own a controlling majority of the shares of Century, further efforts to obtain the desired action from Century would be futile.

 See Second Amended Complaint paras. 87, 96, 106, 118.

 This allegation meets the demand requirements of Rule 23.1. The defendants have acknowledged this. See Memorandum in Support of Defendants' Motion to Dismiss Amended Complaint 8. What the defendants wish is that the court impose one further requirement, one not found explicitly in the text of Rule 23.1: they want the court to hold Grafman's suit in abeyance -- either by dismissal of his claims without prejudice or by staying proceedings -- while Century takes a harder look at whether it wishes to pursue this matter on its own.

 The defendants' position has some merit. Historically, courts deciding whether a plaintiff's demand is adequate under Rule 23.1 have looked only to the allegations of the complaint, much as this court did above. See generally Charles Alan Wright, Arthur R. Miller, and Mary Kay Kane, 7C Federal Practice and Procedure § 1836 (West 1986). The federal courts are beginning to recognize, however, that the procedural requirements of Rule 23.1 overlap with the substantive requirements of the laws of incorporating states. When procedural requirements clash with or attempt to alter substantive rights, the procedures must yield. See the excellent discussion of this topic in Allison on behalf of G.M.C. v. General Motors Corp., 604 F. Supp. 1106, 1115-16 (D.Del. 1985), aff'd, 782 F.2d 1026 (3rd Cir. 1985).

 The parties acknowledge this point. They agree with the Allison court that the law of the state of incorporation -- in this case, the law of Delaware -- controls whether a shareholder has made an adequate demand upon the corporation, and whether that demand is futile. The parties disagree over what Delaware law requires in this case. Part of this disagreement stems from facts. For example, the defendants allege that Century has created a Special Litigation Committee to look into whether Grafman's claims have merit. This fact does not appear in Grafman's Second Amended Complaint, which is the only source of facts on which the court may rely for purposes of a motion to dismiss. Grafman for his part attacks the Committee as being inadequate; for this he too relies on facts outside of his complaint.

 While the procedures of Rule 23.1 must yield to the substantive requirements of Delaware law, the parties have given the court no reason for dispensing with the rest of the Federal Rules of Civil Procedure in deciding the defendants' present motion. The court will not do so. See Allison, 604 F. Supp. at 1119 (declining to deviate from the procedures of Rule 12(b) in deciding motion to dismiss). Since Grafman adequately alleges a demand in his complaint, it is not proper for the court to dismiss Grafman's derivative claims at the present time. If the defendants believe that the undisputed facts entitle them to dismissal pending the findings of Century's Special Litigation Committee, they may make the appropriate motion.

 The defendants argue that notwithstanding whether Grafman may maintain his derivative suit, they are entitled to a stay of discovery pending the Committee's report. The defendants are correct that under Delaware law, the corporation itself has the initial, preemptive opportunity to investigate derivative claims, and to determine whether the corporation should pursue them. See Aronson v. Lewis, 473 A.2d 805, 811-813 (Del. 1984); Kaplan v. Peat, Marwick, Mitchell & Co. 540 A.2d 726, 730 (Del. 1988). The directors of a Delaware corporation may make this determination by appointing a committee. The directors may delegate to this committee the power both to investigate and to terminate derivative litigation. See Zapata Corp. v. Maldonado, 430 A.2d 779, 784-89 (Del. 1981). *fn2" A dissatisfied shareholder may attack the committee's conclusion only after the corporation adopts it. See id. at 788-89.


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