The Different Design of Corporate Governance Under State Law and Federal Law and the Aftermath of the Strougo Case

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Aspen Publishers, Inc.




A solution that does not fully account for the overall design of the law may pose serious problems. In Strougo v. Scudder, Stevens & Clark, Inc.,l the court held that directors serving on numerous investment companies managed by the same adviser and collecting substantial fees for their services may not be' deemed independent. Therefore, the directors' decision that a derivative suit is not in the best interests of the investment companies and their shareholders may not be accorded deference, and demand on these directors may be futile. The decisions triggered a prompt reaction by state legislatures in Maryland2 and Massachusetts.3 The state laws were amended to conform to the definition of disinterested persons in federal law. These two states are important. Maryland is the incorporation home of numerous investment companies organized as corporations, `and Massachusetts is the home state of investment companies organized as trusts. Much has been written about the case, and need not be repeated. However, the subject is not closed, as yet; it may require additional consideration, and perhaps additional action.

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