Shareholder Litigation Outline

Shareholder Litigation

1. Direct Action or Derivative Suit

   1. TEST: Whether a stockholder's claim is derivative or direct turns solely upon the following questions: "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?" Tooley v. Donaldson, Lufkin, & Jenrette, Inc. - pg. 948

      1. TEST re (1): "[H]as the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation?" Tooley v. Donaldson, Lufkin, & Jenrette, Inc. - pg. 949

      2. TEST re (2): "The second prong of the analysis should logically follow." Tooley v. Donaldson, Lufkin, & Jenrette, Inc. - pg. 949

         • EXCEPTION re Close Corporations: The court, at its discretion may treat an action raising derivative claims as a direct action IF it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors to the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.

   2. Direct Action (OFTEN Class Action - See Fed. R. Civ. P. 23)

      1. (1) Adequacy: A named plaintiff must be capable of adequately and fairly representing the interests of the class on whose behalf suit has been brought.

         • SATISFIED where a plaintiff (1) is represented by a qualified attorney and (2) does not have interests antagonistic to the class or the corporation

           • Adequacy requirement satisfied where "no evidence that [Plaintiff] has interests antagonistic to the interests he purports to represent, or that class counsel is incompetent or inexperienced . . . ." In Re Fuqua Industries Shareholder Litigation - pg. 953

             • "[L]ack of proficiency in matters of law and finance and poor health" are irrelevant "so long as he or she has competent support from advisors and attorneys and is free from disabling conflicts." In Re Fuqua Industries Shareholder Litigation - pg. 952

      1. (2) Typicality: Requires contemporaneous ownership of stock (at the time of wrong)

         • If a plaintiff did not hold stock at the time of the alleged wrongful conduct, his injuries, if any, will differ from those of shareholders who did hold stock and his claim will not be typical of those asserted on behalf of the purported class

   3. Derivative Action (See Fed. R. Civ. P. 23.1/Del. Ch. Ct. R. 23.1)

      1. (1) Adequacy: A named plaintiff must be capable of adequately and fairly representing the interests of the shareholders on whose behalf suit has been brought.

         • SATISFIED where a plaintiff (1) is represented by a qualified attorney and (2) does not have interests antagonistic to the class or the corporation

           • Adequacy requirement satisfied where "no evidence that [Plaintiff] has interests antagonistic to the interests he purports to represent, or that class counsel is incompetent or inexperienced . . . ." In Re Fuqua Industries Shareholder Litigation - pg. 953

             • "[L]ack of proficiency in matters of law and finance and poor health" are irrelevant "so long as he or she has competent support from advisors and attorneys and is free from disabling conflicts." In Re Fuqua Industries Shareholder Litigation - pg. 952

      1. (2) Standing: Plaintiff must (1) have been a shareholder at the time of the wrong, (2) must be a shareholder at the time suit is brought, and (3) remain a shareholder throughout the litigation

         • MBCA § 7.40(e) includes in its definition of "shareholder" a person whose shares are held in a voting trust.

         • The ALI allows double derivative suits "[w]here the shareholder's corporation holds at least de facto controlling interest in the injured subsidiary." ALI Principles, § 7.02 Comment f.

           • See, e.g., Brown v. Tenney (allowing the shareholder of P Corporation for alleged injury to S Corporation, a wholly owned subsidiary of P Corporation, where both P and S were controlled by the same alleged wrongdoers).

      2. (3) Demand Requirement - JURIS SPLIT

         • Traditional Approach (DELAWARE)

           • Fed. R. Civ. P. 23.1 provides that a complaint in a derivative suit shall "allege with particularity the efforts, if any, made by the plaintiff to obtain the action plaintiff desires from the directors and the reasons for the plaintiff's failure to obtain the action or for not making the effort." See also, Del. Ch. Ct. R. 23.1.

             • WHERE DEMAND MADE

               • FAILURE TO REJECT DEMAND: Lawsuit moves forward

               • WHERE DEMAND REJECTED

                 • Plaintiff must demonstrate, without the benefit of discovery, that (1) the board rejected her demand without informing itself of the issues involved OR (2) the board relied on attorneys who also represented or had represented the alleged wrongdoer. See Stepak v. Addison - pg. 966

             • WHERE DEMAND NOT MADE, must plead Demand Futility

               • To show demand futility, plaintiffs must allege facts with particularity that raise a reasonable doubt that "(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson v. Lewis - pg. 962

                 • TEST (1)

                 • Interested: (1) A director personally receives a benefit (or suffers a detriment), (2) as a result of, or from, the challenged transaction, (3) which is not generally shared with (or suffered by) the other shareholders of his corporation, and (4) that benefit (or detriment) is of such subjective material significance to that particular director that it is reasonable to question whether that director objectively considered the advisability of the challenged transaction to the corporation and its shareholders OR the director stands on both sides of the challenged transaction. Orman v. Cullman - pg. 752

                 • Independent: Whether the director's decision resulted from that director being controlled by another Orman v. Cullman - pg. 753

                 • A director is controlled by another where (1) that director is in fact dominated by the other, whether by close...

Buy the full version of these notes or essay plans and more in our Corporations Outlines.