Strougo v. Scudder, Stevens & Clark, Inc.

Scudder, Stevens & Clark, Inc. (Scudder) (defendant) was the investment adviser of The Brazil Fund (the fund), an investment company incorporated under Maryland law. The fund’s board of directors decided to increase the fund’s capital by offering existing shareholders the right to purchase shares of newly issued stock. Strougo, a shareholder of the fund, filed a derivative suit and claimed that Scudder and the fund’s directors had breached their fiduciary duties by making the offer to purchase additional shares. Scudder argued that the derivative suit should be dismissed because Strougo had failed to first make a demand for remedial action to the fund’s directors, which Maryland law requires before a shareholder may file a derivative suit. However, Strougo argued that such a demand would have been futile because six of the seven directors of the fund were not adequately independent from Scudder to fairly consider Strougo’s demand, in part because some of the directors received compensation for serving as directors on the boards of other mutual funds managed by Scudder. Scudder conceded that three directors were not independent but argued that the fact that three of the remaining four directors served on boards of other mutual funds managed by Scudder did not diminish their capacity to be independent in considering Strougo’s demand.