## Facts

- Max Eisenberg, a New York shareholder of The Flying Tiger Line, Inc., sued to enjoin a multi-step corporate reorganization and merger.
- Flying Tiger (a Delaware corporation headquartered in California) formed a wholly owned subsidiary, Flying Tiger Corporation (FTC), and FTC formed a wholly owned subsidiary, FTL Air Freight Corporation (FTL).
- Under a reorganization plan approved by the required shareholder vote after an August 11, 1969 proxy statement, Flying Tiger merged into FTL, with FTL surviving and taking over operations.
- Flying Tiger shares were converted into an equal number of FTC shares, and FTL later changed its name to “Flying Tiger Line, Inc.,” leaving public shareholders holding stock in FTC (the holding company) rather than in the operating company.
- Eisenberg alleged the restructuring diluted minority shareholders’ voting power and reduced their ability to influence the operating company.
- The company asserted the restructuring served business and tax objectives, including diversification and tax benefits without regulatory interference.

## Issues

1. Whether a shareholder claim alleging dilution or impairment of voting rights from a reorganization is a direct (personal/representative) action or a derivative action.
2. Whether N.Y. Business Corporation Law § 627 required Eisenberg to post security for costs because the suit was “derivative on behalf of a corporation.”

## Decision

- The Second Circuit reversed the dismissal entered after Eisenberg failed to post the district court’s $35,000 security order.
- The court held Eisenberg’s claim was personal (direct), not derivative, within the meaning of N.Y. B.C.L. § 627.
- Because the action was not derivative, § 627 did not require security for costs.

## Legal Principles

- A claim is derivative when it seeks to enforce a corporate right and the primary injury and any recovery run to the corporation.
- A claim is direct when it seeks to vindicate a shareholder’s individual rights, including voting and governance rights, and the primary injury is to shareholders rather than to corporate assets.
- The representative or class-like character of a suit does not, by itself, make it derivative; courts look to the substantive right asserted and the nature of the injury.
- N.Y. B.C.L. § 627 applies only to derivative actions brought “on behalf of the corporation,” reflecting a policy aimed at screening certain small-holder derivative suits, and it does not extend to direct actions asserting shareholder voting rights.

## Conclusion

The court treated the alleged dilution of shareholder voting power caused by the holding-company reorganization as a direct injury to shareholders’ governance rights, not an injury to the corporation, and therefore held that the New York security-for-costs requirement for derivative suits did not apply.


Eisenberg v. Flying Tiger Line, Inc., 451 F.2d 267 (2d Cir. 1971)