MEMORANDUM OPINION AND ORDER
The Keogh Corporation ("Keogh") sues defendants Howard, Weil, Labouisse, Friedrichs Incorporated, ("Howard Weil"), Howard Weil Financial Corporation ("Howard Weil Financial") and Alan Arnold for violations of RICO. The complaint alleges that defendants took over Keogh's business through RICO violations based on predicate acts of extortion and bribery. The complaint also alleges various pendent state law claims. Defendants move for summary judgment dismissing the action on a number of grounds. In open court, I granted defendants' motion for summary judgment with respect to the state law claims. (5/7/93 Tr. at 32-33, 57; 6/22/93 Tr. at 2-4.) This opinion addresses defendants' argument that the action, purportedly a suit brought by a corporation, must be dismissed because it was not authorized by plaintiff's board of directors. For the reasons discussed below, defendants' motion is granted.
Howard Weil, a wholly-owned subsidiary of Howard Weil Financial, is a New Orleans-based investment banking firm with offices throughout the South. Alan Arnold served as President of Howard Weil and Howard Weil Financial from January, 1985 until June, 1990, the period during which the events at issue in this lawsuit occurred.
Keogh, originally the Public Employee Plans Corporation, was incorporated in January, 1983 to develop, market and administer tax-deferred employee benefit plans for public school employees. The corporation's name was changed to Employee Retirement Funding Corporation in July, 1983 and to the Keogh Corporation in October, 1985.
This action arises from a failed joint business venture between Keogh and Howard Weil to market retirement plans to Louisiana school board employees. The complaint alleges that through a course of conduct consisting of extortion, bribery and fraud, defendants gained control of Keogh's business.
The original complaint which was filed on November 29, 1988 has been amended four times. All discovery has been completed and a Joint Pre-Trial Order has been filed. The parties have submitted voluminous documents in connection with this motion.
It is undisputed that Keogh's board of directors never authorized the commencement of this lawsuit. Seymour Halpern, the President of Keogh, and Arthur Froom, Keogh's Treasurer, authorized commencement of the action. (Neiman Aff, Ex. 8N, Halpern Aff.; Ex. 9N P 6, Froom Aff.)
There is also evidence that a majority of Keogh's stockholders signed consents authorizing the commencement of the action, and authorizing Froom to manage the affairs of Keogh until the resolution of the litigation, including acceptance of any settlement of the action.
Defendants argue that a Delaware corporation may not initiate a lawsuit without the authorization of its board of directors and that the stockholders who instituted the lawsuit in Keogh's name have not complied with Fed. R. Civ. P. 23.1 because they have not made demand on the directors or proffered facts that would establish futility of demand under Delaware law.
Plaintiff argues that Rule 23.1 is not applicable because this is not a derivative action, but rather a direct action by Keogh. Plaintiff does not dispute that its board of directors did not authorize the lawsuit. However, plaintiff contends that the action has been properly authorized in alternative ways. First, plaintiff argues that commencement of the action by Froom and Halpern in their capacity as corporate officers constitutes effective authorization under Delaware law. Second, plaintiff argues that approval of the action by a majority of stockholders is also proper authorization under Delaware law.
Both sides agree that the Delaware law of corporate governance controls the dispositive issue of whether this suit may be entertained by the court.
1. Authority of Corporate Officers
Under Delaware law, the directors are responsible for decisions concerning the management of the corporation, unless the certificate of incorporation or bylaws provide otherwise. 8 Del C. § 141(a) states:
The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.
Section 109(b) states: