A shareholder derivative action is a lawsuit in which a shareholder of a corporation alleges that the corporation is being controlled in a method that benefits the monitoring, not the shareholders. The shareholder have to make a demand to the firm that it recoup its losses from the supervisors who took benefits past what they have to have received, and also if the company does not comply through the request, the aggrieved shareholders can sue the company. Since this litigation deserve to be incredibly cumbersome to the corporation, New Jersey embraced a regulation giving that if a plaintiff in a shareholder derivative suit owned much less than 5 percent of the shares of the corporation being sued, that shareholder need to article a bond to institute the litigation. If the shareholder did not win, the shareholder was required to pay the corporation’s attorney"s fees. Cohen (plaintiff) owned about .0125 percent of Beneficial Industrial Loan Corp. (defendant), which did business in New Jersey. Cohen believed that Beneficial’s administration was enriching itself at the cost of the corporation and also carried suit in federal district court. The district court held that it was not bound to follow the New Jersey statute requiring a bond because, under the ascendancy of Erie R. Co. v. Tompkins, 304 UNITED STATE 64 (1938), the statute was just procedural. The court of appeals reversed and ordered a bond to be posted. The USA Supreme Court granted certiorari.

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