Derivative suits United States corporate law

because directors owe duties corporation , not, general rule, specific shareholders or stakeholders, right sue breaches of directors duty rests default corporation itself. corporation party suit. creates difficulty because always, right litigate falls under general powers of directors manage corporation day day (e.g. delaware general corporation law §141(a)). often, cases arise (such in broz v cellular information systems inc) action brought against director because corporation has been taken on , new, non-friendly board in place, or because board has been replaced after bankruptcy. otherwise, there possibility of conflict of interest because directors reluctant sue colleagues, particularly when develop personal ties. law has sought define further cases groups other directors can sue breaches of duty. first, many jurisdictions outside allow specific percentage of shareholders bring claim of right (e.g. 1 per cent). solution may still entail significant collective action problems shareholders dispersed, us. second, jurisdictions give standing sue non-shareholder groups, particularly creditors, collective action problems less. otherwise, third, main alternative individual shareholder may derive claim on corporation s behalf sue breach of duty, such derivative suit subject permission court.

increasingly courts have denied board should restrict derivative suits, in 2003 case in re oracle corp derivative litigation held insider trading claim against oracle corp ceo larry ellison proceed.

the risk of allowing individual shareholders bring derivative suits thought encourage costly, distracting litigation, or strike suits - or litigation (even if director guilty of breach of duty) seen counterproductive majority of shareholders or stakeholders have no conflicts of interest. accordingly, thought oversight court justified ensure derivative suits match corporation s interests whole because courts may more independent. however, 1970s states, , delaware, began require board have role. common law jurisdictions have abandoned role board in derivative claims, , in states before 1980s, board s role no more formality. then, formal role board reintroduced. in procedure bring derivative suit, first step shareholder had make demand on board bring claim. although might appear strange ask group of directors sued, or colleagues being sued, permission, delaware courts took view decision litigate ought default lie within legitimate scope of directors business judgment. example, in aronson v lewis shareholder of meyers parking system inc claimed board had improperly wasted corporate assets giving 75-year-old director, mr fink, large salary , bonus consultancy work though contract did not require performance of work. mr fink had selected of directors. nevertheless, moore j. held delaware supreme court there still requirement make demand on board before derivative suit brought. there presumption in making business decision, directors of corporation acted on informed basis in faith , in honest belief action taken in best interests of company , if owed jobs person being sued. requirement make demand on board will, however, excused if shown entirely futile , because majority of board alleged have breached duty. otherwise must shown board members in strong sense conflicted, merely working accused directors, , personal ties potentially creates, insufficient courts. indicated significant , controversial change in delaware s judicial policy, prevented claims against boards.

in 1981, in zapata corp v maldonado delaware supreme court held board of zapata corp., founded george h.w. bush, not sued breach of fiduciary duty. independent investigation committee competent reject demand derivative suit, despite being appointed board.

in cases corporate boards attempted establish independent litigation committees evaluate whether shareholder s demand bring suit justified. strategy used pre-empt criticism board conflicted. directors appoint members of independent committee , typically deliberate , come conclusion there no cause bringing litigation. in zapata corp v maldonado delaware supreme court held if committee acted in faith , showed reasonable grounds conclusion, , court satisfied [about] other reasons relating process , committee s decision not allow claim not overturned. applying connecticut law, second circuit federal court of appeals held in joy v north court substitute judgment decisions of supposedly independent committee, , board, on ground there scope conflicting interests. then, substantive merits bringing derivative claim assessed. winter j held overall shareholders have burden demonstrate action more not against interests of corporation . entail cost benefit analysis. on benefit side recoverable damages discounted probability of finding of liability , , costs side include attorney s fees , other out-of-pocket expenses , time spent corporate personnel , impact of distraction of key personnel , , potential lost profits may result publicity of trial. if thought costs exceed benefits, shareholders acquire right sue on corporation s behalf. substantive hearing on merits alleged breach of director s duty may heard. tendency in delaware, however, has remained allow board play role in restricting litigation, , therefore minimize chances held accountable basic breaches of duty.