Chap 9 - Litigation to Enforce Fiduciary Duties

Question 1

What is a Direct suit?

Answer 1

Brought directly by the shareholder. Must be a claim that the shareholder themseves suffered an injury at the hands of the board/officer’s malfesense/negligence. Usually class actions

Question 2

What is a Derivative suit?

Answer 2

Brought by a shareholder on behalf of the corp. Cause of action belongs to the corp as an entity - arises out of an injury done to the coronation itself

Question 3

Agricorp Corp. is an agribusiness: it owns and operates manylarge farms. It has five directors, including Alice Adams, who is theChairperson of the Board and Chief Executive Officer. Adamslearns of an opportunity to purchase a large farm in Indiana.Adams and two of the other directors decide to buy theIndiana farm for themselves. Assume that this constitutes self-dealing in violation of the duty of loyalty. A shareholder wants tosue. Is this a direct or derivative lawsuit?

Answer 3

Derivative. The harm is to the corporation, not the shareholdersthemselves

Question 4

What are the 2 claims within a derivative action?

Answer 4

Suit to compel the company to launch a suit

2. that suit by the company against the directors

Question 5

Who gets recovery in derivative claims?

Answer 5

Just the company

Question 6

In order to address the lack of an incentive to launch derivative actions what is done?

Answer 6

Courts of equity award lawyers fees for successful derivative suits

Question 7

What are the 4 obstacles to strike suits?

Answer 7

(1) plaintiffs must have been shareholders at the time of thealleged breach of duty (“contemporaneous ownership” rule);(2) plaintiffs must remain shareholders throughout the litigation(“standing requirement”);(3) shareholders must “demand” that the board of directors takeaction before the shareholder assumes control of thelitigation (“demand requirement”); and(4) once a derivative claim is filed, the court must approve anysettlement.

Question 8

How does one verify a complaint?

Answer 8

Must have aristo f components with a sworn statment to it. the plaintiff has reviews the complaints, believes them to be true, or if there is no personal knowalge is based on facts that is believed to be true

Question 9

What is the demand requirement?

Answer 9

The complainant must give notice to the board about their problem - Typically, it is a letter from the shareholder to the board ofdirectors. (Written by the lawyers, of course.)Must request that the board bring suit on the alleged causeof actionMust be sufficiently specific as to apprise the board of thenature of the alleged cause of action and to evaluate itsmerits“At a minimum, a demand must identify the allegedwrongdoers, describe the factual basis of the wrongful actsand the harm caused to the corporation, and request remedialrelief.”

Question 10

What happens if the board refuses to act upon the complaint?

Answer 10

plaintiffs can bring a “wrongful refusal”case.* In deciding wrongful refusal cases, the Delaware courts haveheld that by making a demand, a shareholder tacitlyacknowledges the board’s independence and concedes theboard’s capacity to evaluate that demand.* As a result, the court reviews the board’s decision to refusethe demand under the business judgment rule.

Question 11

What is the standard of review for wrongful refusal?

Answer 11

Reasonable doubt as to whether the BJR applied to refuse the demand

Question 12

What is demand futility?

Answer 12

Demand may be excused ifdirectors – due to conflict ofinterest or risk of fiduciary liability– would not be willing to act upondemand (i.e., demand futility)

Question 13

When would a board desciosn be steralized?

Answer 13

To determine demand futility, the Court will decide whether,under the particularized facts alleged, a reasonable doubt iscreated that:1. the directors are disinterested and independent OR2. the challenged transaction was otherwise the product of avalid exercise of business judgment (Aronson case)

Question 14

What was the holding of Beam ex rel. Martha Stewart Living Omnimedia, Inc. v.Stewart?

Answer 14

“[I]n order to show lack of independence, the complaint ofa stockholder plaintiff must create a reasonable doubt that adirector is so ‘beholden’ to an interested director that his or herdiscretion would be sterilized.”For demand futility purposes, “friendship must be accompaniedby substantially more in the nature of serious allegations thatwould lead to a reasonable doubt as to a director’sindependence.”Other cases have made clear that the “substantially more” shouldbe a financial relationship that is material to the particular director - a showing of an interest must be made for a majority of the board -2 of 6 is not enough

Question 15

In MBCA states is the demand requirement a thing?

Answer 15

No! (1) a written demand has been made upon the corporation totake suitable action; AND* (2) 90 days have expired from the date the demand was madeunless the shareholder has earlier been notified that thedemand has been rejected by the corporation or unlessirreparable injury to the corporation would result by waiting forthe expiration of the 90day period.Note: This means there are no demand futility arguments inMBCA states

Question 16

Can the court approve a derivative settlement?

Answer 16

A court must approve a derivative settlement, voluntary dismissal, or comprimise

Question 17

What 9 factors will the court consider to see if a proposed derivative settlement

Answer 17

(1) the maximum and likely recovery;* (2) the complexity, expense, and duration of continued litigation;* (3) the probability of success;* (4) the stage of the proceedings;* (5) the ability of the defendants to pay a larger judgment;* (6) the adequacy of the settlement terms;* (7) whether the settlement vindicates important public policies;* (8) whether the settlement was approved by disinterested directors;and* (9) whether other shareholders have objected

Question 18

What is the holding from Tooley v. Donaldson, Lufkin & Jenrette?

Answer 18

the test for determining whether a suit is derivitive is who the injury is sustained by

Question 19

What is a special litigation committee? What does it do?

Answer 19

A committee appointed by acorporation’s board ofdirectors when challenged by ashareholder derivative action.* The SLC is tasked withconsidering whether it is in thecorporation’s best interest topursue or terminate thederivative litigation

Question 20

What are the 2 steps a SLC must do to properly dismiss litigation?

Answer 20

Step 1: the Court should inquire into the independence and good faith ofthe committee and the bases supporting its conclusions, with burden ofproof on the corporation* Step 2: if the Court is satisfied that the committee was independent andshowed reasonable bases for good faith findings and recommendations,the Court should determine, applying its own independent businessjudgment, whether the motion should be granted by carefully weighinghow compelling the corporate interest in dismissal is when faced with anon-frivolous lawsuit.

Question 21

What was the holding from In re Oracle Corp. Derivative Litigation?

Answer 21

The SLC was not sufficiently indepndent

Question 22

Under the Delaware and MBCA, can shareholders ask for records?

Answer 22

yes, but Bergen case defines the scope

Question 23

What was the holding from AmerisourceBergen?

Answer 23

DGCL § 220(c) provides that stockholders who seek to inspect acorporation’s books and records must establish that that the inspectionsuch stockholder seeks is for a “proper purpose,” which is defined as a“purpose reasonably related to such person’s interest as astockholder.”

Question 24

What was the holding of Re Cornerstone Therapeutics?

Answer 24

Delaware Supreme Court held that even in atransaction subject to entire fairness analysis, plaintiffs mustplead non-exculpated claims against each independent, non-conflicted director, or that individual director will be dismissedfrom the case

Question 25

What are the 3 ways directors and officers can be insured or indemnified?

Answer 25

They price their insurance based on their best assessmentof the liability risk of each individual corporation, whichincentivizes corporations to minimize risk.2. They monitor and seek to improve the corporategovernance practices of the corporations they insure.3. They manage the defense and settlement of corporate andsecurities lawsuits so that only meritorious claims are paid

Question 26

Can the company insure against intentional misconduct or dishonesty?

Answer 26

No

Question 27

Can they be insured against liability for breaches of loyalty?

Answer 27

No

Question 28

Where are indemnification agreements for directors and officers usually found?

Answer 28

Bylaws

Question 29

Do these indemincifation agreements include costs of litigation?

Answer 29

Yes, for a successful defecne