Beam v. Stewart

Shareholder Monica Beam (plaintiff) brought a derivative action against Martha Stewart, her company Martha Stewart Living OmniMedia, Inc. (MSO), and its other directors (defendants) without making a demand on the board or requesting books and records. Beam alleged Stewart breached fiduciary duties to MSO and its shareholders by engaging in insider trading and making public statements about the transaction. Stewart was indicted for selling her shares in a pharmaceutical company the day before negative information about its anticipated cancer drug became public. After two months of adverse publicity on Stewart, MSO’s stock price dropped substantially. When Beam sued, MSO had six directors including Stewart. The second was Stewart’s close, longtime personal friend Sharon Patrick, MSO’s president and chief operating officer. Beam claimed three of the four outside directors also had close enough personal ties to Stewart to inappropriately sway their judgment. However, Beam relied almost entirely on media articles to show those ties. Articles reported that the third and fourth directors were Stewart’s longtime friends and one had attended the same wedding reception as Stewart. The fifth director had contacted a newspaper on Stewart’s behalf about an unflattering biography of Stewart the newspaper planned to publish. Finally, all the directors were paid for serving on the board at least partially in voting stock and received stock options. The directors moved to dismiss for failure to either make a demand on the board or adequately plead demand futility.