Cohen v. Beneficial Industrial Loan Corp.
United States Supreme Court
337 U.S. 541 (1949)
A shareholder derivative action is a lawsuit in which the shareholder of a corporation alleges that the corporation is being managed in a way that benefits the management, not the shareholders. The shareholder must make a demand to the company that it recoup its losses from the managers who took benefits beyond what they should have received, and if the company does not comply with the request, the aggrieved shareholders can sue the company. Because this litigation can be very cumbersome to the corporation, New Jersey adopted a law providing that if a plaintiff in a shareholder derivative suit owns less than five percent of the shares of a company it is suing, that shareholder must post a bond to institute the litigation. If the shareholder does not win, the shareholder must pay the corporation’s attorney fees. Cohen (plaintiff) owned approximately .0125 percent of Beneficial Industrial Loan Corp. (defendant), which did business in New Jersey. Cohen believed that Beneficial’s management was enriching itself at the expense of the corporation, and brought suit in federal court. The district court held that it was not bound to follow the New Jersey statute requiring a bond because, under the rule of Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), the statute was merely procedural. The court of appeals reversed and ordered a bond to be posted. Cohen appealed to the United States Supreme Court.
Rule of Law
Holding and Reasoning (Jackson, J.)
Dissent (Douglas, J.)
Dissent (Rutledge, J.)