Shareholder Litigation

Question 1

A derivative claim is…?

In what context does this often occur?

Answer 1

… a lawsuit brought by a shareholder on behalf of the corporation. The shareholder is suing to enforce the corporation’s rights when the corporation has a valid cause of action, but has failed to pursue it.

This often occurs when the defendant in the suit is someone close to the corporation (e.g., a director or officer).

Question 3

Before making a derivate action, SH must…

Answer 3

Demand. Generally, a shareholder must make a written demand on the board before commencing a derivative action. After submitting the written demand, the shareholder must wait 90 days to file the derivative action, UNLESS the board rejects the demand during the 90-day period.

However, under the common law, and in some jurisdictions today, the plaintiff shareholder does NOT have to make a demand on the board if it would be futile to do so (e.g., the board is interested in the transaction being challenged).

Question 4

As to damages, what happens if a derivative claim is successful?

Answer 4

If a derivative claim is successful, the proceeds go to the corporation, not the shareholder who brought the action. However, if the award to the corporation benefits the defendants, the court may order that damages be paid directly to the shareholder.

Question 5

What is a direct claim made by a SH?

Answer 5

A direct claim is a lawsuit brought by a shareholder to enforce his OWN rights.

Question 6

What must SH prove in a direct claim?

Answer 6

The shareholder must prove actual injury that is NOT solely the result of an injury suffered by the corporation.

Question 7

Who gets proceeds in direct claim?

Answer 7

If a direct claim is successful, the proceeds go to the shareholder.

Question 8

W’hen can the board seek dismissal of the SH’s derivative action?

Answer 8

Under the MBCA, the board can seek dismissal of the shareholder’s derivative action if a majority of the board’s “qualified directors”—those directors who do not have a material interest in the derivative action—determine in good faith, after conducting a
reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corporation’s best interests. Although the Official Comment to
MBCA § 7.44 suggests that a full-blown board investigation is not necessary, the board’s request for dismissal must have “some support in the findings of the inquiry.”

Question 9

Failure by the board to investigate credible allegations of corporate illegality constitutes…

Answer 9

a lack of “good faith.”

Note: even when bribes are widespread, approving such bribes violates duty of good faith.

Question 10

Directors breach their fiduciary duties by failing to…

Answer 10

…act upon “red flags” or “obvious danger signs” of corporate illegality.

Question 11

, the duty to act in good faith requires corporate directors to establish…

Answer 11

…procedures to
ensure the corporation’s compliance with legal norms.
Thus, courts have required corporate directors to establish “[corporate] information and reporting
systems” that provide “timely, accurate information . . . concerning both the corporation’s
compliance with law and its business performance.”