Derivative Suits: Director Demand Under Rule 23.1 and Section 36(b) of the Investment Company Act

In 1882, the Supreme Court first established the conditions precedent to an ordinary derivative action by the shareholders of a corporation. Now after over nine decades of common law development, the present conditions are embodied in Rule 23.1 of the Federal Rules of Civil Procedure. Of relatively recent interest, however, is the relationship between that Rule and section 36(b) of the Investment Act of 1940 (Act), which authorizes a derivative action by the shareholders of a registered investment company. This Note will focus on one aspect of that relationship--the requirement that a plaintiff make a demand upon the corporation\u27s directors before he institutes his action. Rule 23.1\u27s requirement of a director demand has been the source of much controversy. Traditional case law on mutual fund derivative actions has been ambiguous at best. Judicial construction of the Rule 23.1 director demand requirement has, however, followed three general approaches. One view presumes fidelity and diligence on the part of the corporate directors. An opposite view presumes that demand on the directors would be futile under certain conditions. A third view prefers the use of sound discretion to presumptions