Baker v. MacFadden Publications, Inc.

Baker (plaintiff), on behalf of MacFadden Publications, Inc. (MacFadden) (defendant) stockholders, filed a derivative action, alleging that MacFadden’s directors (defendants) had misapplied funds. MacFadden petitioned the court to require the stockholders to provide security for the litigation expenses pursuant to General Corporation Law of New York § 61-b, which requires stockholders in a derivative action to provide security for litigation expenses if the stockholders represent less than 5 percent of the corporation’s shares or have an aggregate value of less than $50,000. The special term court granted the petition on the ground that the stockholders did not meet the Section 61-b minimum requirements. The stockholders were ordered to provide $40,000 in security within 60 days. However, the stockholders were granted leave to vacate the order if enough stockholders to meet the minimum requirements joined the action during the 60-day period. The parties appealed. The stockholders argued that Section 61-b was unconstitutional. MacFadden argued that the security order should not be modified upon stockholders joining the action. MacFadden also argued that the court erred in a previous proceeding by granting the stockholders access to MacFadden’s stock book and stockholder’s list for the purpose of inviting additional stockholders to join the suit. The appellate division held that Section 61-b was constitutional and affirmed the $40,000 order. However, the appellate division held that the stockholders could not move to vacate the order upon the joinder of additional stockholders because the applicability of Section 61-b was to be determined at the time of the motion. The appellate division also reversed the decision to give the stockholders access to MacFadden’s documents on the ground that it was unnecessary based on the Section 61-b ruling. The stockholders appealed to the New York Court of Appeals.