Joy v. North
| Joy v North | |
|---|---|
| Court | Delaware Chancery Court |
| Citation(s) | 692 F 2d 880 (1982) |
| Keywords | |
| Directors' duties, derivative suit | |
Joy v North, 692 F2d 880 (1982) is a US corporate law case, concerning the rules for bringing a derivative suit in Delaware law.
Facts
Doris Joy was a minority shareholder in Citytrust, Inc and Nelson North was the CEO. Doris complained that Nelson had give a loan to Katz Corp, without considering the merits of the deal, because Katz Corp employed Nelson’s son. Citytrust, Inc established a ‘Special Litigation Committee’ of two independent directors, which concluded that the litigation should be discontinued in respect of most of the board members.
Judgment
Justice Winter held that the litigation was warranted. If the case appears to be worth a substantial amount in relation to equity, the case should continue. If not it must consider further business factors.
| “ | The relevant decision - whether to continue litigation - is at hand and the danger of deceptive hindsight simply does not exist. Moreover, it can hardly be argued that terminating a lawsuit is an area in which courts have no special aptitude…
[...] ... what we say here applies to cases involving allegations of direct economic injury to the corporation diminishing the value of the shareholders’ investment as a consequence of fraud, mismanagement or self dealing… In cases such as the present one, the burden is… to demonstrate that the action is more likely than not to be against the interests of the corporation... [...] Where the legal rule is unclear and the likely evidence in conflict, the court need only weigh the uncertainties, not resolve them. The court’s function is thus not unlike a lawyer’s determining what a case is ‘worth’ for the purposes of settlement. [...] Where the court determines that the likely recoverable damages discounted by the probability of a finding of liability are less than the costs to the corporation in continuing the action, it should dismiss the case. The costs which may properly be taken into account are attorney’s fees and other out-of-pocket expenses related to the litigation and time spent by corporate personnel preparing for and participating in the trial… [...] [The court] may take into account two other items as costs. First, it may consider the impact of distraction of key personnel by continued public litigation. Second, it may take into account potential lost profits which may result from the publicity of a trial. [...] Judicial scrutiny… should thus be limited to a comparison of the direct costs imposed upon the corporation by the litigation with the potential benefits. We are mindful that other less direct costs may be incurred, such as a negative impact on morale and upon the corporate image. Nevertheless, we believe that such factors, with the two exceptions noted, should not be taken into account. Quite apart from the elusiveness of attempting to predict such effects, they are quite likely to be directly related to the degree of wrongdoing, a spectacular fraud being generally more newsworthy and damaging to morale than a mistake in judgment as to the strength of consumer demand. |
” |
Justice Jackson said derivative suits are a ‘remedy born of stockholder helplessness,’ such helplessness resulting from the fact that stockholders were ‘numerous and scattered’ and held but ‘small interests’.
Justice Caramone, dissenting, disapproved of the method. He said future attorney fees and litigation expenses, corporate goodwill and corporate morale cannot be determined.
| “ | This calculus is so complicated, indefinite and subject to judicial caprice as to be unworkable... This veritable Pandora’s box of unanswered questions raises more problems than it solves. Even more fundamentally unsound is the majority’s underlying premise that judges are equipped to make business judgments… Reasons of practicality and good sense strongly suggest that business decisions be left to businessmen.
[...] In a land weary of overregulation and the kind of judicial activism embodied in the second step of Maldonado, there may well be a strong inclination for business to incorporate in states more hospitable to them. See, e.g., Genzer v. Cunningham, 498 F.Supp. 682, 688 (E.D.Mich.1980)’ [...] The Business Round Table, a group of over one hundred chief executive officers of America’s largest corporations has publicly stated that a view like the one adopted by the majority will lead to more derivative lawsuits being brought, make it more difficult for corporations to have them dismissed, discourage risk-taking and make fewer candidates willing to serve on boards of directors. |
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See also
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