Barr v. Wackman

36 N.Y.2d 371, 368 N.Y.S.2d 497, 329 N.E.2d 180 (1975)

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Nature of the Case

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Facts

P, a shareholder of Talcott National Corp. brought this shareholder's derivative action against Gulf & Western, Associates First Capital Corp., a subsidiary of Gulf & Western and 16 Talcott directors (Ds). Five of 16 are affiliated with Talcott in official capacities in addition to their positions as directors. The remaining 11 are not alleged to be affiliated with Talcott otherwise than in their capacity as directors. Talcott is engaged through its various subdivisions in the fields of commercial, industrial and real estate financing, product and equipment manufacturing, insurance and leather processing. It is alleged that in late 1972 D, Gulf & Western, determined to acquire control of Talcott because Talcott's finance-related business represented a potentially valuable expansion of the finance business conducted by D's wholly owned subsidiary, Defendant First Capital. This led to an agreement in principle for the merger of Talcott into Gulf & Western at a value of $24 per Talcott share. The agreement was approved by the board of directors of each corporation. Thereafter, Ps assert, the affiliated directors, in return for certain pecuniary and other personal benefits, entered into a plan and scheme with Gulf & Western to help it obtain control over Talcott on an altered basis substantially less favorable to Talcott and its shareholders than the previously approved merger proposal. Various actions are claimed to have been taken pursuant to this scheme, not only by the individual affiliated directors and the corporate defendants but also by Talcott's board itself. On behalf of Talcott, the complaint seeks a judgment directing Ds to account for profits they gained by reasons of the acts alleged and for damages sustained by Talcott. It also seeks to enjoin the defendants from effectuating the employment and consulting agreements as well as to enjoin Gulf & Western and First Capital from voting any shares acquired in the tender offer and exercising any control over Talcott. Three of the Ds moved to dismiss the complaint on the ground that the reasons offered in justification of the failure to make a demand are insufficient under subdivision (c) of section 626 of the Business Corporation Law. Consol.Laws, c. 4. In affirming the Supreme Court's denial of appellants' motion to dismiss, the Appellate Division stated that a demand is excused where the board itself is accused of patent breach of its fiduciary duties, and its members are named as parties defendants. We agree.