## Facts

- A shareholder of R.C. Williams & Company, Inc. (a New York corporation) brought a derivative action on the corporation’s behalf against officers, directors, and a majority stockholder; the corporation was named as a nominal defendant.
- The complaint sought recovery of alleged short-swing profits under § 16(b) of the Securities Exchange Act of 1934 and alleged additional losses from transactions purportedly violating federal securities laws and New York corporate law.
- The law firm Breed, Abbott & Morgan, long-time general counsel to the corporation, entered appearances for both the corporation and the individual defendants.
- The firm filed a joint answer for the corporation and the individual defendants denying wrongdoing and seeking dismissal.
- Plaintiff moved to (i) strike the corporation’s answer, (ii) strike the firm’s appearance as counsel for the corporation, and (iii) require the corporation to appear through “genuinely independent counsel” whose answer would be limited to an invitational, non-adversarial posture.
- The motion was made shortly after the answer was filed.

## Issues

1. In a shareholder derivative action alleging wrongdoing by management and a controlling stockholder, must the nominal corporate defendant be represented by independent counsel rather than the same firm representing the accused insiders?
2. Should the corporation’s jointly filed answer denying wrongdoing be stricken and replaced with a limited, neutral “invitation to prove” pleading?

## Decision

- The court denied the motion to strike the corporation’s answer.
- The court denied the motion to disqualify Breed, Abbott & Morgan as counsel for the corporation.
- The court denied the request to compel the corporation to appear through separate “independent counsel” and to require an “invitation-only” answer.
- The court treated the motion as timely but found the requested relief unwarranted on the record at the pleading stage.

## Legal Principles

- In a derivative suit, joint representation of the corporation and defendant directors/officers is not automatically improper solely because the insiders are accused of wrongdoing.
- A court need not require the nominal corporate defendant to retain separate “independent counsel” or to file only a neutral, non-adversarial answer absent a stronger showing of an actual or imminent conflict that would prejudice the corporation or the proceedings.
- The corporation, even as a nominal defendant in a derivative action, is not required at the pleading stage to forgo defenses or to adopt a purely non-oppositional litigation posture by court order.

## Conclusion

The court declined to restructure the corporation’s defense in the derivative action by disqualifying joint counsel or striking the corporation’s adversarial answer, holding that the asserted conflict concerns did not, by themselves and at the pleading stage, justify imposing independent counsel or a constrained “invitation to prove” response.


Lewis v. Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y. 1963)