Corporations (Shareholder Litigation)

Question 1

Corporations (Shareholder Litigation)

Shareholder Information & Inspection Rights

Answer 1

Generally, shareholders have a right to inspect certain books and records of the corporation, so long as:

1. It is in good faith
2. It is for a proper purpose, and
3. The shareholder satisfies certain share ownership requirements (generally number of shares and/or holding period)

Question 2

Corporations (Shareholder Litigation)

Shareholder Information & Inspection Rights:
Proper vs. Improper Purpose

Answer 2

The inspection be reasonable related to one’s interest as a shareholder.

Proper Purpose

1. Desire to determine if the corporation is being managed poorly
2. To communicate with other shareholders about such management

Improper Purpose

1. Desire to harm the corporation
2. For the shareholder’s personal benefit

Question 3

Corporations (Shareholder Litigation)

Shareholder Information & Inspection Rights:
Permissible Requirements

Answer 3

Corporations are usually free to require inspections be done:

1. Upon prior notice
2. During reasonable business hours
3. At the shareholder’s expense - reasonable cost of copies

Question 4

Corporations (Shareholder Litigation)

Shareholder Information & Inspection Rights:
Standard of Review: Seinfeld Test

Answer 4

A stockholder need only establish by a preponderance of the evidence that there is a credible basis for which a court can infer a possibility of wrongdoing

A stockholder does not need to commit in advance to the ends to which it will use the information

Question 5

Corporations (Shareholder Litigation)

Shareholder Information & Inspection Rights:
Attorney-Client Privilege Exception (Garner)

Answer 5

Upon a showing of good cause, stockholders may invade the corporation’s attorney-client privilege in order to prove fiduciary duty breaches by those in control of the corporation.

Question 6

Corporations (Shareholder Litigation)

Shareholder Information & Inspection Rights:
Attorney-Client Privilege Exception (Garner)

Answer 6

1. Number of Shareholders and Total Percentage of Stock Represented
2. Nature of the Claim
3. Availability of other Sources
4. Whether or not the shareholders are blindly fishing
5. The risk of revealing trade secrets

Question 7

Corporations (Shareholder Litigation)

Majority Shareholders

Answer 7

Shareholders who own a majority stake (more than 50%)

Generally presumed to be controlling shareholders

Question 8

Corporations (Shareholder Litigation)

Controlling Shareholders

Answer 8

Shareholders with the ability to excercise control over the corporation

May be a majority or minority stockholder

For minority controlling stockholders –> Court must look to actual control

Question 9

Corporations (Shareholder Litigation)

Direct Action v. Derivative Action

Claim, Recovery, Defendant, Other Rules

Answer 9

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Question 10

Corporations (Shareholder Litigation)

Direct Action

Answer 10

Shareholders may bring direct actions against the corporation for injury caused directly to the shareholder

Shareholders who are similarly situated may bring a class action against the corporation.

Question 11

Corporations (Shareholder Litigation)

Direct Action:
Private Securities Litigation Reform Act

Answer 11

Makes it harder for shareholder suits to succeed

Plaintiffs must state specific details rather than alleging general misconduct

Eliminated joint and several liability for various securities violations for those who did not knowingly commit violations.

Question 12

Corporations (Shareholder Litigation)

Derivative Action

Answer 12

Shareholders may bring derivative actions against the corporation on behalf of the corporation for injury caused to the corporation for which the corporation fails to seek redress

Examples
1. Mismanagement
2. Waste of Corporate Assets
3. Breach of Fiduciary Duty

Question 13

Corporations (Shareholder Litigation)

Derivative Action:
Requirements

Answer 13

1. Standing
   a. Contemporaneous Ownership - at the time of the complained-of incident
   b. Continuous Ownership - ownership throughout litigation
   c. Exceptions: Mergers (Fraud or De Facto Doctrine)
2. Demand Requirements
   a. Universal vs. Nonuniversal Demand Jurisdictions

Question 14

Corporations (Shareholder Litigation)

Derivative Action:
Universal vs. Non-Universal Demand Jurisdictions

Answer 14

Universal Demand: Must first make Demand

Non-Universal Demand: Either (1) Make Demand or (2) Demand-Excused Futility

Question 15

Corporations (Shareholder Litigation)

Derivative Action:
Demand Requirement

Answer 15

A shareholder cannot bring a derivative suit unless they:

1. Make a written demand to the corporation to take action
2. Wait 90 days from delivery of the demand, unless either
   a. The demand was already rejected
   b. Irreparable injury will occur by waiting

After receiving a demand, the corporation can decide to either:

1. Institute litigation
2. Take control of previously instituted litigation
3. Decide not to pursue the matter

If the corporation decides to pursue the matter, the shareholder’s right to initiate and control litigation generally ends

NOTE: By making the demand, the shareholder has conceded that they consider the board to be disinterested and independent

Question 16

Corporations (Shareholder Litigation)

Derivative Action:
Demand Excused Futility Tests

Answer 16

The shareholder must plead particularized facts that show the demand ought to be excused because the directors are not objective under either:

1. Aronson Test - Challenging a Board Decision
2. Rales Test - Asserting a Claim of Board Inaction

Question 17

Corporations (Shareholder Litigation)

Derivative Action:
Demand Excused Futility
Aronson Test

Answer 17

For challenging Board Decisions
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The shareholder must raise a reasonable doubt that either:

1. A majority of directors are disinterested and independent
   OR
2. The transaction was the product of a valid exercise of the business judgment rule
   a. Board not adequately informed
   b. Board lacked good faith

NOTE: If the corporation’s charter includes § 102(b)(7) exculpatory provisions (only duty of care claims), the plaintiff must plead particularized facts demonstrating the directors acted with scienter.

Question 18

Corporations (Shareholder Litigation)

Derivative Action:
Demand Excused Futility
Rales Test

Answer 18

For Caremark Claims/Board Inaction
.
The shareholder must raise a reasonable doubt that a majority of the board could have exercised independent and disinterested business judgment in responding to the demand

NOTE: Essentially prong (1) of the Aronson Test

Question 19

Corporations (Shareholder Litigation)

Derivative Action:
Special Litigation Committees

Answer 19

A board committee comprising directors who are independent and disinterested with respect to the subject of the derivative lawsuit that investigates and recommends whether the corporation should institute litigation

Litigation in Best Interest –> Corporation moves to dismiss claim on behalf of the corporation

Litigation Not in Best Interest –> No business judgment rule protections

Question 20

Corporations (Shareholder Litigation)

Insurance/Indemnification Trends

Answer 20

Corporations may indemnify or reimburse directors

Many directors and officers refuse to serve unless the corporation procures Director and Officer Liability Insurance, which insures against claims made against directors and officers
.
Usually includes:
1. Attorneys fees and costs
2. Amount of a judgment rendered against a director or officer if they were acting in good faith
.
Rarely includes protections for willful, fraudulent, or reckless acts