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GRAFMAN v. CENTURY BROADCASTING CORP.

March 28, 1991

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; and Richard J. BONICK, JR., Defendants


Brian Barnett Duff, United States District Judge.


The opinion of the court was delivered by: DUFF

BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 The plaintiff, Howard Grafman, has filed this 8 count complaint alleging two separate injuries. The first is to himself, and the second is to the corporation, Century Broadcasting Corporation ("Century"). This opinion deals only with the latter.

 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 thrice amending his complaint, and the court assumes familiarity with that opinion for purposes of this one. Counts 2, 4, 6, and 8 of the third amended complaint are brought on behalf of Century. In Count 2, 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 4, Grafman alleges violations of 18 U.S.C. §§ 1962(b) and 1962(d). In Count 6, he alleges violations of 18 U.S.C. §§ 1962(a) and 1962(d). Count 8 is a state law claim for breach of fiduciary duty. For each of these counts, in counts 1, 3, 5 and 7, respectively, Grafman brings a mirror-image claim on behalf of Grafman, himself.

 In this court's July 3, 1990 memorandum opinion, it determined that Century's board could hire an independent committee to assess the validity of the plaintiff's derivative claims. Grafman v. Century Broadcasting Corporation, 743 F. Supp. 544, slip op. at 5 (N.D. Ill. 1990). The corporation hired Resolve Dispute Management Incorporated ("Resolve"), headed by Michael Greenwald. After the corporation spent over $ 170,000 for the committee's report, and after an exhaustive analysis by Resolve of all of the plaintiff's claims and other potentially suspect transactions, the committee determined that the board should not pursue the derivative claims.

 Delaware has developed a systematic approach for courts to use in reviewing a report by an independent committee. The court should first look at the independence of the committee, whether its recommendations were made in good faith, and whether the committee made a reasonable investigation. Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. Sup. 1981). The court can then, in its own discretion, move to a second step and apply its own business judgment to determine whether the suit should be pursued. Kaplan v. Wyatt, 499 A.2d 1184 (Del. Sup. 1985). This court is now at the stage where it is time to review the report of the independent committee. Such a review would have proceeded without haste if it was not for a recent seventh circuit case, Kamen v. Kemper Financial Services Inc., 908 F.2d 1338 (7th Cir. 1990). The first question confronting the court is whether Kamen applies retroactively.

 Retroactive Application

 Kamen was decided in July of 1990, one year after the plaintiff filed his complaint. The seventh circuit held that there is no futility exception to the requirement of making a demand on a corporation to pursue a shareholder derivative action. Id. at 1347. The shareholder must make a demand, and the propriety of management's decision on whether to pursue the action shall be determined by looking to state law, in this case Delaware. Id. The result of this opinion was to take the very foundation of Zapata out from under itself.

 There are good reasons for applying the business judgment rule to cases where the board of directors of a corporation, untainted with self interest, makes an ordinary corporate decision. Courts are in the business of interpreting law, not deciding whether a board made the correct business decision. This court would be out of its element if it were to tell Chrysler that it should not have built an additional plant. Such issues are best left unlitigated or at least entitled to some degree of deference by the courts. *fn1" In any event, the next board of directors election could weed out board members who were not making the grade, or the market would eventually reflect the fact that something was amiss and a change was called for.

 So what of the cases where no demand is made because demand would be futile. Here is the sticking point. Delaware law tells the court to look behind the failure to make a demand to determine whether demand would in fact have been futile. If demand was not futile, than the court would have to conclude that demand was required and dismiss the action for failure to make one. Aronson v. Lewis, 473 A.2d 805 (Del. Sup. 1984). On the other hand, if demand would have been futile, then the board has the power to expand its numbers and hire an independent litigation committee. This is the case before the court.

 This case is a textbook example of why Delaware developed a futility exception to the demand requirement. In this case, the plaintiff was trying to compel Century to sue the majority of its board of directors who together controlled over 50% of the corporation for self dealing. There is little doubt on this record that if the question was put to a vote, the board of directors would decline to sue themselves. If this court were to accord their decision the presumption of fairness that the business judgment rule requires, a corporation could always rid itself of derivative actions, whether or not they had any merit.

 Kamen holds that federal common law contains a demand requirement. Therefore, the shareholder must make a demand. After the demand is made, the court must look to state law to determine the propriety of the board's decision. Id. at 1347. This ruling places federal courts in a rather awkward position. Delaware law's test is dependent on whether a demand was required in the first place. If demand is made then the court is to assume that demand is required and apply the business judgment rule. Spiegel, 571 A.2d at 775. In fact Kamen suggests this result. The court stated, "the making or failure to make a demand will not alter the business judgment standard that ordinarily applies to corporate decisions." Kamen, 908 F.2d at 1347. This is the business judgment rule.

 The answer cannot be so simple. Kamen explicitly recognizes the use of an independent committee. Why then would there ever be a need for such a committee if a board could field all of the shareholder's pleas to sue and was protected by the business judgment rule? Any board whose members were sued would simply ...


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