Demand Requirement Flashcards
What is the difference between direct and derivative litigation?
Direct litigation is an assertion of one’s own rights. Derivative litigation is where a shareholder sues to assert the rights of the corporation
True or False: derivative proceeding derive from statutory authority
False. They are a judicially crafted equitable remedy
What is the problem with derivative litigation?
Standing. When one asserts their own rights, it is not an issue. However, allowing an individual shareholder to assert the rights of the corporation has difficulties
Aside from the demand requirement, what is required for a shareholder to have standing in a derivative suit?
1) shareholder at time act or omission occurred
2) fairly and adequately represent interests of corporation
3) remain a shareholder throughout the litigation
What is the test to determine if a suit is direct or derivative?
1) who suffered the harm-the corporation or the individual
2) who would receive the benefit of recovery
Complaint must establish
True or False: Direct suits still must meet the demand requirement
False. The demand requirement is excused in a direct suit
What is the demand requirement?
Before suing, a shareholder must demand the Board address their grievance. Under the MBCA, this must always be done to bring a derivative suit. In Delaware, the demand requirement may be excused
When may the demand requirement be excused?
When the demand would be futile because
1) the board has a conflict of interest
OR
2) the challenged transactions is otherwise not a valid exercise of business judgement
What are the factors for demand futility?
Did director receive material personal benefit
Will director face liability under the claim
Does director lack independence from someone who will receive a benefit
What are a board’s options when a demand is made to it?
They can cure the issue, choose to sue, or choose not to sue
If a demand is made and the Board chooses not to sue, what then?
The court will analyze such refusal under the rules of fiduciary duty
What happens if a demand is required, is not made, and is not excused?
The suit will be dismissed
True or False: the demand requirement is a threshold for a suit, and therefore must be determined at the outset
True. As it concerns standing, the demand requirement has to be addressed before anything else
True or False: for demand futility, one must show that a MAJORITY of directors were conflicted
True
True or False: when analyzing conflicts under demand futility, a minority of directors voting to approve will defeat the claim
False. We only care about showing that a majority had a conflict. Of course, approval by independent directors may be a problem if your underlying claim is a conflict transaction
What is a special litigation committee?
Formed after the onset of litigation. Ideally, they are composed of independent individuals who decide the merits of the suit and if the corporation should take up the suit
True or False: Courts are deferential to the findings of a special litigation committee
False. Courts are suspect of them. The SLC must prove it is independent. Even if independent and in good faith with bases supporting, the court will still exercise its own business judgement in determining if the suit should proceed
True or False: SLC’s are not entitled to the protections of the business judgement rule
True
