## Facts

- Mildred Kamen, a shareholder, brought a derivative action on behalf of a Maryland-incorporated mutual fund registered under the Investment Company Act of 1940 (ICA).
- The suit alleged the fund’s investment adviser, Kemper Financial Services, Inc., violated the ICA by obtaining shareholder approval of the advisory contract through materially misleading proxy materials.
- Kamen did not make a pre-suit demand on the fund’s board to pursue the claims.
- She alleged demand was excused because it would have been futile given the directors’ lack of independence from the adviser.
- The district court dismissed for failure to plead demand futility with sufficient particularity under Federal Rule of Civil Procedure 23.1.
- The Seventh Circuit affirmed and adopted a federal “universal demand” rule requiring demand in all derivative actions, eliminating any futility exception.
- The Supreme Court reviewed whether federal courts may replace state demand-futility rules with a federal universal-demand standard in ICA derivative litigation.

## Issues

1. Whether the scope of the demand requirement (including any futility exception) in an ICA derivative action is procedural under Rule 23.1 or substantive corporate law.
2. Whether federal courts hearing ICA derivative actions must apply the state of incorporation’s demand-futility doctrine or may impose a uniform federal “universal demand” rule.

## Decision

- The Supreme Court reversed and remanded.
- The Court held that the demand requirement’s scope, including demand futility, is a matter of substantive law, not procedure.
- Rule 23.1 governs only the specificity and adequacy of pleading; it does not define when demand is required or excused.
- Federal courts must incorporate the corporation’s state law demand-futility doctrine into federal common law unless that state law conflicts with federal statutory policy.
- The Seventh Circuit erred by adopting a universal-demand rule without applying Maryland law or identifying any inconsistency between Maryland’s doctrine and the ICA.
- The Court did not decide whether Kamen’s allegations satisfied Maryland’s futility standard; that determination was left for the lower courts on remand.

## Legal Principles

- Federal Rule of Civil Procedure 23.1 regulates pleading standards in derivative actions and does not create or alter substantive demand or futility requirements.
- When federal securities statutes leave gaps on questions allocating authority within the corporation, federal courts generally borrow state corporate law unless the state rule is inconsistent with the federal statute’s policies.
- In derivative actions under the ICA, the applicable demand and demand-futility standards are supplied by the law of the corporation’s state of incorporation (here, Maryland), absent a demonstrated conflict with the ICA.

## Conclusion

The Court required federal courts adjudicating ICA derivative suits to apply the demand-futility doctrine of the corporation’s state of incorporation, treating demand futility as substantive corporate governance law and limiting Rule 23.1 to pleading adequacy.


Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90 (1991)