Court Ruling Affirms Board Primacy

In a recent decision to dismiss a shareholder derivative suit against directors and officers of Morgan Stanley, a federal district court reaffirmed the fundamental principal that boards, not stockholders, are charged with making corporate business decisions, including whether to file suit against company managers or make discretionary disclosures.

A memo issued on the Harvard Law School blog today written by Wachtell, Lipton, Rosen & Katz points out that the Southern District of New York Court (aka “The Mother Court”) dismissed a stockholder derivative suit filed against the Morgan Stanley board arising out of management changes in 2005.

The opinion also dealt with the federal disclosure obligations and corporate governance responsibilities. The plaintiffs’ lawsuit made several claims, purportedly on behalf of Morgan Stanley, against former officers of the company and its board in the wake of well-publicized management changes at Morgan Stanley in the summer of 2005.

In order to bring their lawsuit in federal court, the plaintiffs tried to manufacture federal securities law claims that focused on Morgan Stanley’s receipt in January 2005 of a notice that the staff of the Securities and Exchange Commission’s Division of Enforcement had made a preliminary determination to recommend that the SEC pursue an action against Morgan Stanley for allegedly violating federal recordkeeping laws (Wells Notice).