Term
| What's a Shareholder Derivative Lawsuit? |
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Definition
| A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Usually, the third party is an insider such as an officer, director, or major SH who has breached his fiduciary duties to the corporation. Importantly it is the company who recovers, not the SH(s) who file the suit. |
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Term
| Requirements for Derivative Suit Part I |
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Definition
| To file a derivative suit there is a two-part test. First, who suffered the alleged harm—the corporation or the SH individually? Second, who would receive the benefit of any recovery or other remedy—the corporation or the shareholders? Finally, a shareholder who files a derivative suit must have owned stock at the time of the alleged wrong and must still own the stock up to the time of trial. |
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Term
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Definition
| A plaintiff must make a written demand on the BOD before commencing with a derivative suit. The demand must demand the board to bring a suit or take other corrective action. Only if the board refuses to act may the plaintiff then commence suit. However, demand is often excused when it is futile. |
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Term
| What is Demand Futility and when is it appropriate? |
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Definition
Demand on the board is excused when it would be futile. Demand will be deemed to be futile, and thus excused if the board is accused of having participated in the wrongdoing.
Under Aronson, demand will be excused only when the plaintiff can show a reasonable doubt as to the whether the board was disinterested and/or independent, or when he can show a reasonable doubt as to the board’s exercise of the BJR. To make the showing of reasonable doubt from Aronson, the plaintiff must plead facts showing specificity to either board. |
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Term
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Definition
| If any of the qualifications—the shareholder requirements or Aronson are not met, then a plaintiff will have to make a written demand on the Board to file a lawsuit against the alleged offending party. |
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Term
| What is the Internal Affairs Doctrine and what issue will it usually arise under? |
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Definition
ISSUE: Which state’s laws will govern the internal affairs of the corporation?
McDermott: the laws of the state of incorporation govern internal corporate relationships. The law of one state governs the relationships of a corporation to its stockholders, directors and officers in matters of internal corporate governance so that the corporation knows which laws govern it (predictability). |
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Term
| What's a "security for expenses statute"? |
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Definition
| It's usually a state statute that, with respect to a stockholder's derivative action, requires that a plaintiff give security for reasonable expenses, including attorney’s fees incurred by the corporation and by the defendant, and which makes the plaintiff liable for such expense if he does not make good on his claims. |
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