Shareholder Suits Flashcards
Direct Suit
Where management has abridged a contractual/statutory duty owed directly to the shareholder as an individual, the shareholder may bring suit on his own behalf. May be maintained as a class action suit.
Derivative Suit
Suit brought by shareholders on behalf of the corporation against management for breaching a duty; to redress injuries done directly to the corp. Generally corp. benefits, but P-shareholder may be entitled to reimbursement for expenses.
Prerequisite to Suit- Exhausting Corp. Remedies DEMAND
P-shareholder must allow board opportunity to remedy wrong complained of before proceeding w/suit. Board can either comply or refuse the action demanded.
Prerequisite to Suit- Exhausting Corp. Remedies FUTILITY
Demand on director may be excused if shareholder demonstrates it would be futile. Futile when all or a majority of directors: 1) are interested in that they are/are controlled by the alleged wrongdoers 2) Have failed to exercise reasonable care to prevent the wrong by fully informing themselves about the challenged transaction 3) Could not have used sound business judgment cuz transaction so egregious on its face.
Prerequisite to Suit- Exhausting Corp. Remedies SPECIAL LITIGATION COMMITTEE
A board of directors may appoint a special committee of disinterested directors to determine whether the suit would be in the corp’s best interest. A court will determine whether the committee was truly disinterested and whether its procedures and methodology of investigation were sufficient.
Business Judgment Rule (BJR)
Presumes that directors act on an informed basis in good faith and in an honest belief that their actions are for the good of the company. Judgment of directors will be accepted by courts unless decisions shown to be tainted by fraud, illegality, or a conflict of interest. Where the matter complained of does not involve wrongdoing by the directors, then board’s good faith refusal to sue bars the action.
