Lesson 7

Question 1

Derivative Suits

Answer 1

A derivative suit is a lawsuit in which a shareholder pursues a claim on the corporation’s behalf
because the directors (whose job it is to pursue the claims) wrongfully refuse to do so.

Question 2

Auerbach Approach

Answer 2

Under the Auerbach approach the Court seeks to respect the business judgment of the Board, and will enforce the Board’s decision if the decision was made in good faith, independent of outside influence, and properly informed. The Court will limit its review of the Board’s decision to the procedures and methodologies behind the investigation.

Question 3

Zapata Approach

Answer 3

Under the Zapata approach the Court uses the Auerbach approach except the Court adds a second “prong”. Even if the first prong is satisfied, the Court can exercise its own business judgment and require the liability lawsuit if the Court determines that dismissal does not serve the best interests of the corporation and its shareholders.