Cohen v. Beneficial Indus. Loan Corp. case brief summary

Cohen v. Beneficial Indus. Loan Corp. case brief summary

 

Facts: Delaware corporation.  Del. has no statute re: security for expenses to protect against strike suits.  The company does business in NJ, which does have a statute mandating bonded security for expenses unless the shareholder owns 5% or $50,000 worth of stock

Issue: Even though Delaware law would apply to internal corporate affairs, should New Jersey law regarding strike suits be applied?

Analysis: Strike suit law is substantive in nature, not procedural.  By Erie, state law is applied

Holding: New Jersey substantive law regarding strike suits is applicable.

Criticism: If state law is applied, and Delaware state law was applicable, why wasn’t Delaware law applied, since it should be the governing state law!?

 

Cohen Rules for Shareholder Derivative Suits

Rule of Fiduciary Character: A stockholder who brings a suit on a cause of action derived from the corporation assumes a position that is one of fiduciary character.

Policy: The interests of all in redress are in the plaintiff’s hands; there was no election of the plaintiff by the other shareholders, because he is a “volunteer champion.”

Rule of State Plenary Power: A state has plenary power to regulate strike suits.

Policies: 1) Constitution does not obligate placing the litigation and adjudication processes at the disposal of such a representative; 2) Lawyers can and do use strike suits to extort corporations out of settlement fees, so the state has a legitimate interest in protecting corporations from this activity.

 

Must Determine Whether a Suit is Derivative or Direct: One must determine ahead of time whether a suit is derivative or direct in nature to further determine whether the plaintiff is liable for defendants’ attorneys’ fees if unsuccessful, and whether plaintiff is liable to provide a security bond during the pendency of the case.