FACT PATTERN 4: SHAREHOLDERS SHAREHOLDER DERIVATIVE SUITS

Question 1

In a derivative suit, a shareholder is suing to enforce what?

Answer 1

the corporation’s claim, not her own personal claim.

Question 2

In a derivative suit always ask what?

Answer 2

Could the corporation have brought this suit? If so it is probably a derivative suit

Question 3

S, a shareholder of C Corp., sues the board of directors of C Corp. for usurping corporate opportunities. Is that a derivative suit? Why or why not?

Answer 3

YES—duty of loyalty (and care) are owed to corporation. The corporation could have brought this suit for breach of duties owed to it.

Question 4

S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights. Is this a derivative suit?

Answer 4

No, this is a shareholders personal claim. Corporation not hurt corporation can’t sue.

Question 5

S sues another shareholder for oppression in a close corporation. Derivative?

Answer 5

No, oppression notion is a direct suit is a breach of a duty to a shareholder, not the corporation

Question 6

If the shareholder plaintiff wins the derivative suit: Who gets the money from the judgment?

Answer 6

The corporation

Question 7

If the shareholder plaintiff wins the derivative suit: What does the shareholder plaintiff receive?

Answer 7

Costs and attorneys’ fees, usually from the judgment won for the corporation.

Question 8

If the shareholder plaintiff (S) loses the derivative suit:Can S still recover costs and attorneys’ fees?

Answer 8

No

Question 9

If the shareholder plaintiff (S) loses the derivative suit: Is S liable to the defendant he sued for that defendant’s costs and attorneys’ fees?

Answer 9

Yes, if he sued without reasonable cause.

Question 10

Can other shareholders later sue the same defendants on the same transaction for a derivative suit?

Answer 10

No, it is claim preclusion

Question 11

What are the requirements for bringing a shareholder derivative suit?

Answer 11

1. Stock ownership when the claim arose and throughout the suit.
2. Adequate representation of the corporation’s interest.
3. Must make a written demand on the corporation (usually that means the board) that the corporation bring the suit.
4. The corporation must be joined as a defendant

Question 12

To bring a derivative suit, the person bringing suit must have owned stock at the time the claim arose or have gotten it by what?

Answer 12

operation of law from someone who did own it then

Question 13

What are examples of “operation of law?”

Answer 13

inheritance and divorce decree

Question 14

In many states you must always make a written demand on the corporation that the corporation bring the suit, and cannot sue until ____ days after making the demand.

Answer 14

90

Question 15

in many other states, you don’t have to make a written demand on the corporation that the corporation bring the suit if it would be _______. What is a good example?

Answer 15

Futile; When a majority of the directors will be the defendants in the suit.

Question 16

Can the parties settle or dismiss a derivative suit?

Answer 16

Only with court approval

Question 17

What can the court do when it’s contemplating settling or dismissing a derivative suit?

Answer 17

The court may give notice to shareholders and get their input on whether to dismiss or settle.

Question 18

What is one way the corporation get a derivative suit dismissed?

Answer 18

Corporation can move to dismiss on the basis that independent investigation showed the suit was not in the corporation’s best interest (e.g., low chance of success or expense would exceed recovery).

Question 19

Who must run the independent investigation to see if the derivative suit is in the best interest of the corporation?

Answer 19

independent directors or a court-appointed panel of one or more independent persons.

Question 20

In ruling on a motion to dismiss a derivative suit do to a finding in an independent investigation that the suit was not in the corporation’s best interest what will the court look at to dismiss?

Answer 20

the court will look to see if those recommending dismissal are independent and, if so, dismiss. But in some states, the court will also make an
independent assessment of whether dismissal is in the company’s best interest.