Shareholder Actions Flashcards
Derivative v. Direct Action: Two Pronged Test
Tooley Test:
(1) who suffered the alleged harm?
(2) who would receive the benefit of any recovery or remedy?
What is a Derivative Suit?
A Cause of Action that belongs to the corporation as an entity, that is brought by a shareholder on the corporation’s behalf, and that arises out of an injury done to the corporation as an entity.
How is a Demand made?
Demand made by shareholder –> directors have reasonable time to analyze and respond
How do directors analyze Demand after it’s made?
Decision is analyzed under the business judgment rule, unless there is a breach of the duty of loyalty.
What happens when the directors base their decision regarding Demand on the BJR?
If the board rejects the demand and it was based on the BJR, then the suit is over.
– UNLESS, the plaintiff can show that the BJR does not apply because the board was self-interested, decision was made in bad faith, or it was uninformed (breaches in the duty of loyalty).
How can a Corporation protect itself over decisions regarding Demand Futility?
The Corporation can form a Special Litigation Committee to protect its decision.
What is Demand Futility?
The Shareholder does not need to make a demand that a company’s board file a lawsuit before bringing a derivative action on behalf of the corporation if he can show that the demand would be futile; the shareholder may still proceed by establishing the board’s refusal was wrongful.
What does Demand recognize?
The Demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of the corporation.
What are factors for determining if a Demand was futile?
- A majority of the board has a material financial or familial interest
- A majority of the board is incapable of acting independently for some other reason
- The underlying transaction is not the product of a valid exercise of the Business Judgment Rule
What must a plaintiff allege in a Demand to show futility?
Must cast reasonable doubt that EITHER:
(a) the majority was dis-interested or independent, OR
(b) it WASN’T a valid exercise of the business judgment rule
- -thus, showing that a majority of the board was interested, or exercised poor business judgment
What is the role of Special Litigation Committees?
Demonstrate the practical reasons for the BJR? Courts are not well-equipped to make business decisions
What happens if the Board is comprised of all bad guys, in the context of demand futility?
An independent investigation committee comprised solely of two new directors: does not use the BJR, and may cause its corporation to file a pretrial motion to dismiss based on the best interests of the corporation.
What test does the Court apply if a independent investigation committee files a pre-trial motion to dismiss a derivative action on the basis of demand futility?
Two-step test:
(1) independence, good faith, and a reasonable investigation,
(2) THEN, the Court should determine, by applying its own independent business judgment, whether the motion should be granted
What is a “self-interested” director?
Directors are self-interested where they will receive a direct financial benefit from the transaction, which is different form the benefit to shareholders generally; gaining some benefit shareholders will not.
How can an “interested” Board of Directors be “cleansed”?
Three DIFFERENT Ways:
(1) the decision is approved by a majority of the fully informed, and disinterested directors
- -could still argue duty of care violation, but as long as the board took steps to fully inform themselves of the situation, and there was no fraud, illegality, bad faith, or egregious decision, the BJR would protect the vote
(2) decision ratified by informed shareholders
(3) decision shown to be intrinsically fair (price and terms of the deal are analyzed)
