Rights of Shareholders and Alternative Business Forms

Question 1

What is a derivative suit?

Answer 1

A suit where a shareholder is suing to enforce the corporation’s cause of action.

Question 2

How do you determine whether a suit is a derivative suit?

Answer 2

Ask yourself: could the corporation have brought this suit? If so, it’s a derivative suit (as opposed to a direct action brought to enforce the shareholder’s own rights).

Question 3

What are the requirements for bringing a shareholder derivative suit?

Answer 3

1. Contemporaneous stock ownership
2. Adequacy
3. Demand

Question 4

What makes stock ownership contemporaneous?

Answer 4

The stockholder must own at least one share of stock when the claim arose and throughout the suit.

Question 5

What is the adequacy requirement?

Answer 5

The shareholder who brings suit must fairly and adequately represent the corporation’s own interest.

Question 6

What is the demand requirement?

Answer 6

1. The shareholder must make a demand to the board of directors to bring suit, and the demand must be rejected by the board or no decision made by board for 90 days.
2. The shareholder must allege in the suit that the directors didn’t adequately review the decision to file suit.

Question 7

Even if the derivative suit requirements are met, a committee of 2 or more independent directors can…

Answer 7

investigate and move for dismissal if it concludes that the derivative suit is not in the best interest of the corporation.

Question 8

What are the consequences of a successful derivative suit?

Answer 8

1. Recovery goes only to the corporation
2. Stockholders get costs and attorney fees
3. Recovery is capped
   
   1. Any recovery against an individual director is limited to $100k, or that director’s past year’s compensation, whichever is greater.