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SILVER v. ALLARD

August 18, 1998

Sidney J. Silver, and Rebecca Whelan, derivatively and on behalf of Unicom Corporation and Commonwealth Edison Company, Illinois Corporations, Plaintiffs,
v.
Jean Allard, Edward A. Brennan, James W. Compton, Bruce Demars, Sue L. Gin, Donald P. Jacobs, Edgar D. Jannotta, George E. Johnson, Edward A. Mason, Leo F. Mullin, James J. O'Connor, Frank A. Olson, and Samuel K. Skinner, Defendants, and Unicom Corporation and Commonwealth Edison Company, Illinois Corporations, Nominal Defendants. Steven J. Gutter, derivatively and on behalf of Unicom Corporation and Commonwealth Edison Company, Illinois Corporations, Plaintiffs, v. Jean Allard, Edward A. Brennan, James W. Compton, Bruce Demars, Sue L. Gin, Donald P. Jacobs, Edgar D. Jannotta, George E. Johnson, Edward A. Mason, Leo F. Mullin, James J. O'Connor, Frank A. Olson, and Samuel K. Skinner, Defendants, and Unicom Corporation and Commonwealth Edison Company, Illinois Corporations, Nominal Defendants.



The opinion of the court was delivered by: NORGLE

OPINION AND ORDER

 CHARLES R. NORGLE, SR., District Judge:

 Before the court are the motions of Defendants and Nominal Defendants to dismiss [Docket Nos. 48-1; 50-1] Plaintiffs' consolidated complaint. For the following reasons, the motions of Defendants and Nominal Defendants are granted.

 I. BACKGROUND

 On May 8, 1998, Plaintiffs, Sidney J. Silver, Rebecca Whelan, and Steven J. Gutter, as shareholders *fn1" of Unicom Corporation ("Unicom") filed a Consolidated Derivative Action Complaint for Breach of Fiduciary Duty. The Shareholders seek to bring a "double derivative suit" *fn2" on behalf of Unicom and Commonwealth Edison Company ("ComEd"), Illinois corporations, pursuant to the State of Illinois. *fn3" Unicom is a holding company *fn4" for ComEd; ComEd owns and operates several nuclear power plants and provides electricity to a diverse base of customers.

 Plaintiffs allege that ComEd's Board of Directors (who were also Unicom's Board of Directors), Jean Allard, Edward A. Brennan, James W. Compton, Bruce Demars, Sue L. Gin, Donald P. Jacobs, Edgar D. Jannotta, George E. Johnson, Edward A. Mason, Leo F. Mullin, James J. O'Connor, Frank A. Olson, and Samuel K. Skinner ("Directors"), breached their fiduciary duties to Unicom and ComEd by (1) permitting ComEd and its employees to operate its nuclear power plants in violation of applicable government regulations; (2) failing to provide the financial and human resources necessary to insure that ComEd's nuclear power plants were operated in compliance with applicable government regulations; and (3) failing to implement remedial programs or establish procedures to monitor the effectiveness of such programs.

 Defendants argue that the consolidated complaint should be dismissed because Plaintiffs have failed to make a demand upon the Board of Directors of Unicom and ComEd to initiate the lawsuit and have failed to plead facts with sufficient particularity to excuse such a pre-suit demand.

 II. DISCUSSION *fn5"

 In a derivative suit, an individual shareholder seeks to enforce a right that belongs to the corporation. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95, 114 L. Ed. 2d 152, 111 S. Ct. 1711 (1991). In a double derivative suit, such as the present case, a "shareholder of a holding company seeks to enforce a right belonging to the subsidiary, [but] only derivatively to the holding company." Brown v. Tenney, 125 Ill. 2d 348, 532 N.E.2d 230, 233, 126 Ill. Dec. 545 (Ill. 1988). "Devised as a suit in equity, the purpose of the derivative action was to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of 'faithless directors and managers.'" Kamen, 500 U.S. at 95. However, in order to maintain "the basic principle of corporate governance that the decisions of a corporation--including the decision to initiate litigation--should be made by the board of directors or the majority of shareholders," many jurisdictions have required a pre-suit demand. Id. at 96, 101.

 Generally, the demand requirement imposes as a prerequisite to a derivative suit that the shareholder make a demand upon the board of directors to enforce a corporate right or demonstrate that extraordinary conditions exist to excuse such a pre-suit demand. Id. at 95. The purpose underlying the demand requirement is to provide the directors an opportunity to exercise their business judgment and determine whether litigation is in the best interest of the corporation. Id. at 96 (alteration in original) (internal quotation marks and citations omitted); see also Spillyards v. Abboud, 278 Ill. App. 3d 663, 662 N.E.2d 1358, 1366, 215 Ill. Dec. 218 (Ill. App. Ct. 1996) ("The purpose of this rule is to give the corporation the opportunity to rectify an alleged wrong without litigation through intracorporate dispute resolution and to control any litigation which does arise."). However, to the extent that the demand requirement allows a pre-suit demand to be excused, it allows the shareholder to circumvent the directors' authority to control corporate litigation. 500 U.S. at 101.

 Because the demand requirement delineates the respective powers of the shareholder and the directors, the substantive law of the state of incorporation should be applied. Id.; Boland v. Engle, 113 F.3d 706, 710 (7th 1997); Starrels v. First Nat'l Bank of Chicago, 870 F.2d 1168, 1170 (7th Cir. 1989). Under Illinois law, "[a] complaint in a proceeding brought in the right of a corporation must allege with particularity the demand made, if any, to obtain action by the directors and either why the complainant could not obtain the action or why he or she did not make the demand. . . ." 805 Ill. Comp. Stat. 5/7.80(b); see also Schnitzer v. O'Connor, 274 Ill. App. 3d 314, 653 N.E.2d 825, 829, 210 Ill. Dec. 630 (Ill. App. Ct. 1995) ("whether demand is made or proven futile is merely a prerequisite to a derivative action under Illinois' demand statute"). In a double derivative suit, the shareholder must make a pre-suit demand upon both the holding company and the subsidiary. See Brown, 532 N.E.2d at 235-36.

 In order for federal courts to apply state law properly, Federal Rule of Civil Procedure 23.1 requires the shareholder 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." Rule 23.1 is a rule of procedure, governing the adequacy of the shareholder's pleading, and cannot be interpreted to "'abridge, enlarge or modify any substantive right.'" Kamen, 500 U.S. at 96 (citation omitted). Accordingly, the law of the state of incorporation, here Illinois, controls the substantive rights of the shareholder and the directors. Id. at 101.

 Plaintiffs argue that the pre-suit demand requirement should be excused as futile. When demand is excused, "the shareholder enjoys the right to initiate 'suit on behalf of his corporation in disregard of the directors' wishes.'" Id. at 96 (citation omitted). The "futility" exception to the demand requirement, therefore, establishes the circumstances in which the shareholder is allowed to circumvent the directors' authority to manage corporate affairs. Id. at 102.

 Whether the shareholder should be permitted to proceed with a derivative suit "without making demand typically is made at the outset of the litigation and is based on the application of the State's futility doctrine." Id. at 104. Hence, the court must "attempt to predict how the Illinois Supreme Court would decide the issues presented here. [Citations omitted]. Where the Illinois Supreme Court has not ruled on an issue, decisions of the Illinois Appellate courts control, unless there are persuasive indications that the Illinois Supreme Court would decide the issue differently." Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir. 1997). The court will also consider law from ...


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