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Law Outlines Business Association (Duke Cox) Outlines

Derivative Suit Litigation Outline

Updated Derivative Suit Litigation Notes

Business Association (Duke Cox) Outlines

Business Association (Duke Cox)

Approximately 77 pages

Business Association Outline for Professor Cox from Duke Law...

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Derivative Suit Litigation

A. Nature of the Suit

  1. P requirements in a derivative suit

    1. Standing

      1. Must be a SH contemporaneous with act

      2. And throughout action

    2. Diversity jurisdiction

    3. Demand

    4. Intervention

      1. Whether someone can attach to the suit for economic gain (ex. Caremark: derivative suit filed, parasitic to gov’t action)

    5. Settlement

    6. Equitable defenses

    7. Counterclaims

  2. Test to distinguish between direct and derivative actions:

    1. Who suffered the alleged harm? If the corporation, then derivative

    2. Who would receive the benefit of the recovery or other remedy?

    3. Does the suit threaten the rights of creditors? If so, it should be derivative.

    4. Would allowing direct suit for the alleged wrong result in multitudinous litigation by a large number of plaintiffs, and/or induce individual plaintiffs to sue early on in order to secure their portion of the liability? If so, it should be derivative.

    5. Is the decision to sue or not sue otherwise more properly in the hands of the corporation than the SH? If so, it should be derivative.

  3. Examples

    1. CEO steals 1 M from corporation= derivative: corporation is harmed, all SH harmed equally

    2. Self-dealing by directors= derivative: the corporation is harmed

    3. Corporation says shares are worth 50 (when they are actually worth 40) and Jerry buys the shares at 40= direct action because the corporation is not injured, only the SH

    4. Corporation did not pay any dividends even though it earned large profits

      1. Companies pile up cash pay more taxes= harmful to the corporation, derivative

B. Vicarious Incapacity and Contemporaneous Ownership Rules

  1. VICARIOUS INCAPACITY DOCTRINE: If a company is bought for a fair price and then find out that the seller (or former managers) misbehaved, the corporation cannot sue the seller because that would cause a windfall to the buyer. To allow the corp. to recover would produce a windfall for the new owners whose purchase price presumably took into account any losses caused by the earlier wrongs.

  2. CONTEMPORANEOUS OWNERSHIP REQUIRMENT: in order to bring derivative suit, a plaintiff must have been a SH at the time of the alleged wrong, and must continue as SH throughout the suit.

    1. Date of acquisition for inherited shares is the date the decedent acquired the shares.

C. The Demand on the Directors Requirement

  1. Demand in MBCA Jurisdictions:

    1. Prior to instituting a derivative suit, the plaintiff must make a demand for the board to consider whether such a derivative suit is in the best interests of the corporation. MBCA § 7.42(1). Once the Plaintiff makes such demand, the board has 90 days to respond. MBCA § 7.42(2).

    2. Upon receiving a demand from a plaintiff, the board must evaluate the demand, and accept or reject it. The board must first decide what entity is qualified to evaluate the demand, and then have that entity do the actual evaluation.

    3. Choosing the evaluation entity:

      1. If the board has a quorum of qualified (disinterested) directors, then the board can choose to evaluate the demand either (a) itself or (b) by a committee of qualified (disineterested) directors appointed by the board.

      2. If the board does not have a quorum of qualified (disinterested) directors, then the board must evaluate the demand (b) by a committee of qualified (disineterested) directors appointed by the board.

    4. Whichever entity the board chooses (the board itself or a committee), that entity shall “determine in good faith, after conducting a reasonable inquiry upon which its conclusions are based, whether the maintenance of the derivative proceeding is not in the best interests of the corporation.” MBCA § 7.44(a).

    5. § 7.44(d) If, notwithstanding the board’s presumed rejection, the prospective plaintiff would still like to litigate the case, he may commence a suit. P must establish either

      1. that a majority of the board of directors did not consist of qualified directors at the time the determination was made, or

      2. that the requirements of subsection (a) have not been met.

    6. Finally, even if a plaintiff has already overcome this barrier to entry, a derivative proceeding shall be dismissed by the court on motion by the corporation if one...

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