Master New York’s leading case on demand futility in derivative suits, holding that directors are interested when setting their own compensation. with this comprehensive case brief.
Marx v. Akers is a cornerstone New York Court of Appeals decision on shareholder derivative litigation, particularly in the context of director compensation. The case clarifies when a shareholder may bypass the statutory requirement to make a pre-suit demand on the board by adequately pleading demand futility under New York Business Corporation Law § 626(c). It simultaneously reinforces the business judgment rule’s protection of board decision-making while carving out a critical exception for board decisions about directors’ own pay.
For director-compensation lawsuits, Marx v. Akers is especially significant. It recognizes that directors who set their own compensation are inherently interested in that decision, thereby excusing demand where a majority of the board participated. At the same time, the court tightened pleading standards for challenges to executive compensation and alleged waste, insisting on particularized facts that raise a genuine doubt about disinterestedness, informed decision-making, or the basic soundness of the transaction.
Marx v. Akers, 88 N.Y.2d 189, 666 N.E.2d 1034, 644 N.Y.S.2d 121 (N.Y. 1996)
Shareholders of International Business Machines Corporation (IBM) brought a derivative action against IBM’s directors, including John F. Akers, alleging that the board approved excessive compensation for directors and top executives, and thereby committed waste and breached fiduciary duties. Plaintiffs did not first make a demand on the board, asserting that demand would be futile because the directors were either interested or had approved the challenged transactions. The complaint attacked (1) increases and benefits related to compensation for non-employee (outside) directors—compensation the board itself set—and (2) compensation awarded to corporate officers. Plaintiffs argued that directors could not independently judge a suit targeting compensation they granted to themselves, and that the executive compensation and related decisions were so disproportionate and unwise as to constitute corporate waste. Lower courts dismissed portions of the complaint for failure to plead demand futility with particularity. The case reached the New York Court of Appeals to determine whether the complaint sufficiently alleged futility to excuse pre-suit demand under BCL § 626(c).
When is pre-suit demand on the board excused as futile under New York BCL § 626(c) in a shareholder derivative action challenging (1) directors’ self-approved compensation and (2) compensation awarded to executive officers and alleged corporate waste?
Under New York BCL § 626(c), a shareholder who brings a derivative suit must either make a pre-suit demand on the board or plead with particularity the reasons demand would be futile. Demand is excused as futile where the complaint alleges with particularity facts showing that: (1) a majority of the board is interested in the challenged transaction or lacks independence; or (2) the board failed to inform itself to a degree reasonably necessary under the circumstances (i.e., grossly negligent process); or (3) the challenged transaction is so egregious on its face that it could not have been the product of sound business judgment (i.e., waste). Directors are considered interested when they set their own compensation because they derive a personal financial benefit not shared equally by shareholders. Conclusory allegations of excessiveness are insufficient; plaintiffs must plead specific, particularized facts to overcome the business judgment rule.
Demand was excused as futile for the claim challenging directors’ own compensation because a majority of the board was interested in the decision fixing their pay. Demand was not excused for the claims challenging executive officers’ compensation and alleged waste because plaintiffs failed to plead particularized facts showing director interest, lack of independence, inadequate information, or that the transactions were so egregious as to constitute waste. The claim regarding director self-compensation could proceed; the remaining claims were properly dismissed for failure to plead demand futility.
The court began by reaffirming the policy behind the demand requirement: it preserves the board’s authority to control corporate litigation and prevents strike suits. However, demand is excused when the board cannot impartially consider a demand due to interest, compromised independence, or other circumstances defeating the business judgment rule. Applying that framework, the court held that when directors set their own compensation, they are inherently interested because they receive a direct, personal, and material financial benefit not shared by shareholders. Where a majority of the board approved the compensation, the complaint adequately pleads that the board is incapable of acting disinterestedly on a demand to sue over that very decision. The court therefore excused demand as futile for the director-compensation claim. In contrast, challenges to compensation of executive officers did not implicate board self-dealing. Those decisions ordinarily fall within the board’s protected business judgment. To excuse demand, plaintiffs needed to plead particularized facts showing that a majority of directors were interested or not independent, that the board’s process was grossly deficient, or that the compensation was so irrational as to amount to waste. Plaintiffs’ generalized assertions that executive compensation was “excessive” or “unreasonable,” without concrete factual support (such as metrics, comparators, or process deficiencies), were conclusory and insufficient to overcome the presumption that directors acted on an informed basis and in good faith. The court also rejected the notion that merely naming all directors as defendants, or pointing to the board’s approval of a transaction, automatically establishes futility. Instead, particularized facts are required to show actual interest, lack of independence, informational failure, or facial egregiousness. This preserves the board’s managerial prerogative while ensuring judicial scrutiny where directors directly benefit from their own pay decisions.
Marx v. Akers sets New York’s canonical demand-futility standard for derivative suits and directly addresses director compensation. It teaches that: (1) directors are per se interested in decisions about their own pay; (2) conclusory labels of “excessive” compensation do not suffice to plead waste or overcome the business judgment rule; and (3) plaintiffs must allege particularized facts about board interest, independence, process, or the facial egregiousness of the transaction. For law students, Marx is essential for understanding how New York calibrates the balance between board authority and shareholder enforcement in compensation disputes, and how to properly plead demand futility with the necessary specificity.
The court held that when directors set their own compensation, they are interested in that decision, and if a majority participated, pre-suit demand is excused as futile. Thus, a derivative claim challenging directors’ self-compensation can proceed without demand if the complaint pleads those facts with particularity.
A plaintiff must plead with particularity facts showing that: (1) a majority of directors are interested or not independent, or (2) the board failed to inform itself to a degree reasonably necessary, or (3) the transaction is so egregious that it could not be the product of sound business judgment (i.e., waste). Generalized or conclusory allegations are insufficient.
Because plaintiffs did not plead particularized facts showing board interest or lack of independence, a deficient decision-making process, or facial egregiousness. Merely alleging that executive pay was “excessive” or unwise does not overcome the business judgment rule, which protects informed, good-faith decisions by disinterested directors.
No. The court emphasized that demand is not excused simply by suing all directors or by alleging the board approved the challenged transaction. Plaintiffs must allege specific facts demonstrating interest, lack of independence, process failure, or waste.
Marx’s formulation is closely aligned with Aronson’s two-prong approach (disinterestedness/independence and valid exercise of business judgment), but articulated under New York law and BCL § 626(c). Both regimes demand particularized facts and preserve a broad business judgment presumption while recognizing futility where directors are self-interested—such as in setting their own pay.
For director pay, allege that a majority of the board approved their own compensation and describe the nature of the benefit. For executive pay, include particularized facts about the board’s process, comparators, performance metrics, or red flags showing waste or an uninformed decision. Avoid conclusory assertions and anchor the pleading in specific facts.
Marx v. Akers is a foundational case for derivative litigation in New York, especially in compensation disputes. It delineates when shareholders may bypass the demand requirement: clearly for director self-compensation (where a majority of directors are interested) and only with particularized, robust allegations for challenges to executive compensation or claims of waste.
For students and practitioners, the case underscores a dual message. Courts will not second-guess informed, good-faith compensation decisions for officers absent strong, specific facts. Yet courts will scrutinize director self-dealing in setting their own pay, recognizing that such decisions compromise disinterestedness and thereby excuse demand. The opinion thus harmonizes the business judgment rule with a meaningful pathway to challenge genuine conflicts of interest.