## Facts

- Shareholders of American Telephone & Telegraph Company (AT&T) brought a derivative action against AT&T and most of its directors.
- AT&T allegedly provided communications services to the Democratic National Committee (DNC) in connection with the 1968 Democratic National Convention, leaving an unpaid balance of about $1.5 million.
- The complaint alleged AT&T’s officers and directors took no action to collect the debt for several years.
- Shareholders alleged the non-collection (1) breached directors’ fiduciary duties by failing to act with due care in corporate affairs, (2) constituted unlawful preferential treatment under 47 U.S.C. § 202(a), and (3) amounted to a prohibited corporate political contribution under then-applicable federal law (18 U.S.C. § 610).
- Requested relief included injunctions requiring collection and barring further services until payment, plus a surcharge against directors for the corporation’s benefit.
- The district court dismissed for failure to state a claim, viewing collection decisions as protected by the business judgment rule absent illegality or breach of duty.

## Issues

1. Whether the complaint stated a derivative claim that directors breached fiduciary duties by knowingly causing or permitting conduct that violated federal law through intentional non-collection of a major debt owed by a political committee.
2. Whether the business judgment rule can shield directors’ inaction where the challenged conduct is alleged to be illegal or contrary to public policy.

## Decision

- The Third Circuit reversed the dismissal and remanded.
- Applying the Rule 12(b)(6) standard, the court held the allegations and reasonable inferences had to be taken in the shareholders’ favor at the pleading stage.
- The court concluded the complaint stated a claim because alleged knowing illegality and public-policy violations are not insulated by the business judgment rule.
- The allegations concerning an unlawful corporate political contribution and discriminatory treatment under federal communications law were sufficient to proceed beyond the pleading stage.

## Legal Principles

- On a motion to dismiss, a court must accept well-pleaded factual allegations as true and draw reasonable inferences for the plaintiff; the question is entitlement to offer evidence, not ultimate proof.
- Under applicable state fiduciary-duty law, directors may face liability for illegal or ultra vires conduct even if undertaken with a belief it benefits the corporation.
- The business judgment rule does not protect board action or inaction alleged to constitute a knowing violation of law or clearly articulated public policy.
- A derivative complaint can state a fiduciary-duty claim where directors allegedly allow corporate resources to be used in a manner that constitutes an unlawful political contribution or unlawful discrimination in services.

## Conclusion

The Third Circuit held that shareholders stated a derivative claim where they alleged AT&T’s directors knowingly failed to collect a substantial debt in a manner amounting to illegal political support and statutory violations; such alleged illegality falls outside business-judgment protection, requiring further proceedings on the merits.


Miller v. Am. Tel. & Tel. Co., 507 F.2d 759 (3d Cir. 1974)