Shareholders: Derivative Suits

Question 1

Derivative Suit - Basic Concept

Answer 1

• SH is suing to enforce claim of CORP, not own personal claim
• if SH believes corp has been wronged but dirs haven’t done anything to enforce its rights wrt the wrong, SH can bring derivative suit to enforce corp rights

Question 2

Derivative Suit vs. Direct Action

Answer 2

• SH can bring direct action for breach of fiduciary duty owed to SH by officer or dir

To distinguish between the two, ask:
1) who suffers most immediate + direct damage (corp or SH)?
2) to whom did def’s duty run, corp or SH?

Question 3

Corp Q to Determine Whether Derivative Suit

Answer 3

• could corp have brought this suit? (if so, der suit)

Question 4

Derivative Suit - Recovery

Answer 4

• if SH wins a judgment, corp gets the $ from the judgment
• SH may recover costs + attorneys fees if ct orders (usually paid from corp’s judgment)
  -> can’t do this if loses
  -> may need to pay reasonable expenses of def if ct finds brought suit w/ no reasonable cause or for improper purpose

Question 5

Reqs for Derivative Suits

Answer 5

• standing (stock ownership at time of wrong and adequate representation)
• demand reqs
• corp joined as def

Question 6

Stock Ownership at T of Wrong

Answer 6

• to be pl, SH needs to have been SH at t claim arose OR must’ve become SH through transfer by op of law from someone who owned stock at t claim arose

Question 7

Adequate Representation

Answer 7

• SH must fairly + adequately represent the corp’s interest

Question 8

Demand Reqs

Answer 8

• SH must make written demand on corp (usually means the board) to take suitable action
• in some states, demand must always be made + SH can’t sue until 90 days after making demand unless:
  1) SH has earlier been notified that corp has rejected the demand OR
  2) irreparable injury to corp would result by waiting for the 90 days to pass
• in other states, not required to make demand if would be futile (ex: dirs = defs)

Question 9

Corporation Joined as Def

Answer 9

• even though you’re asserting corp’s claim, corp must be joined as def (b/c didn’t assert own claim)

Question 10

Dismissal or Settlement - Court Approval

Answer 10

• parties can settle or dismiss der suit ONLY w/ ct approval
• ct may give notice to SHs + get their input re whether settle or dismiss
• after ds filed, corp may move to dismiss

Question 11

Dismissal - Corp’s Best Interests

Answer 11

• dismissal if found NOT in co’s best interests
  -> must be based on independent investigation that concludes this (ex: low chance of success or expense would exceed recovery)
  -> investigation must be by independent dirs or court-appointed panel of one or more persons

Question 12

Motion to Dismiss Re Corp’s Best Interests - Court Determination

Answer 12

• in ruling on motion to dismiss, ct will dismiss if finds:
  1) those recommending dismissal were truly independent AND
  2) they made a reasonable investigation

Question 13

Dismissal - Burden of Proof

Answer 13

• to avoid dismissal, SH bringing action usually has burden of proving to ct that decision was NOT made in good faith after reasonable inquiry
• however, if majority of dirs had personal interest in controversy, corp will have burden of showing decision made in good faith after reasonable inquiry