DOCSLIB.ORG

Los Angeles Lawyer April 2015

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Los Angeles Lawyer April 2015 Exper Guide to THE MAGAZINE OF THE LOS ANGELES COUNTY BAR ASSOCIATION t W PAGE it ne 38 sse s APRIL 2015 / $4 EARN MCLE CREDIT PLUS 2014 Ethics Prosecuting Roundup Elder Financial page 23 Abuse page 30 Lender Liability after Foley page 12 Inverse Condemnation for Water Damage page 14 Secrecy in Doubling Mediation page 68 Down Los Angeles lawyer Robert M. Heller argues that double derivative indemnity litigation may come to California page 16 by Robert M. Heller Doubling Down Doubling Down California has yet to follow Delaware and other jurisdictions and allow double derivative standing ALTHOUGH DOUBLE DERIVATIVE corporation is controlled by the wrongdoers who wished to reduce or eliminate the risk of standing has been adopted in many jurisdic- who may be expected to refuse to file suit breach of fiduciary duty and other actions tions outside California to address the mod- against themselves.3 On the other hand, when against themselves could simply form and ern corporate form,1 California courts have an individual owns an interest in a parent operate through a corporate subsidiary while yet to rule on whether it will be allowed in this company, and its subsidiary is the target of also controlling the parent.5 For this reason, state. Application of the double derivative wrongdoing, the individual does not directly numerous jurisdictions have kept stride with principle permits a shareholder of a parent own shares in the subsidiary.4 Classic single “the realities of the changing techniques and company to sue for harm to its subsidiary and derivative standing does not convey a right to structures of the modern corporation.”6 Courts prevents corporate fiduciaries from using the sue on behalf of the subsidiary, because the in other states have recognized and steadily parent-subsidiary form to circumvent share- individual only owns an interest in the par- expanded the double derivative category of holder derivative litigation. California’s pol- ent. Technically, only the parent, as the direct standing, which allows an owner in a parent icy of affording a right for every wrong, how- owner of the subsidiary, has single derivative company to file suit in favor of a subsidiary.7 ever, portends California’s adoption of double standing to sue on behalf of the subsidiary. Foreign Law derivative standing.2 What recourse, then, exists if the sub- Shareholders, limited partners, LLC mem- sidiary’s board refuses to file suit, and the Double derivative theory evolved over a cen- bers, and others may bring a derivative action board of the parent also refuses to bring a tury ago.8 It was well established in New York on behalf of an entity when that entity has suf- single derivative action on the subsidiary’s as early as 1948,9 in Delaware as early as fered harm and those controlling it refuse to behalf? If no other person has standing to sue, 1963,10 and has been applied and ex- panded file suit. The right of an individual to sue a subsidiary could be left without a remedy. in numerous other jurisdictions as well as in the derivatively is critical to ensure that insider The mere layer of a second corporate structure corporate wrongdoing is addressed. In fact, could insulate wrongdoers under a simple for- Robert M. Heller practices business litigation with it is the only recourse available when the mula of abuse: corporate boards and officers an emphasis on shareholder disputes. KEN CORRAL 16 Los Angeles Lawyer April 2015 n Model Business Corporations Act.11 The ques- actions also had equitable, rather than purely California practitioners representing the tion of whether California will adopt double statutory, origins. would-be double derivative plaintiff may cite derivative standing can, in part, be evaluated California courts are also likely to look to the foreign cases discussed above and may fur- by examining the reasons double derivative Delaware decisions.19 For decades, Delaware ther consider advancing additional arguments standing has been adopted in other states. courts have recognized double derivative to secure standing. A particularly illustrative opinion was standing, and in 2010, the Delaware Supreme First, Corporations Code Section 800(b), issued in 1988 by the Illinois Supreme Court Court greatly expanded the theory in Lam- which authorizes shareholder derivative suits, in Brown v. Tenney.12 There, three share- brecht v. O’Neal.20 The Lambrecht court expressly permits derivative actions by “a holders formed a corporation, appointed first reviewed prior Delaware decisions, such shareholder, of record or beneficially.” The themselves to its board of directors, and oper- as Sternberg v. O’Neil,21 in which the parent legislature added the term “beneficially” to ated the business. They then formed a sepa- company acquired the subsidiary before the Section 800(b) in 1975, but did not define the rate corporation to act as a holding com- alleged wrongdoing had occurred. The term. Pearce v. Superior Court,26 a 1983 pany, exchanged their shares for an equal Lambrecht court confirmed: “In these cir- appellate court decision, was the first case to percentage of the holding company’s shares, cumstances, our law recognizes a right to examine the new term, observing that bene- and elected themselves as directors of the proceed double derivatively. Otherwise, there ficial shareholder standing was added as part holding company. would be no procedural vehicle to remedy the of “the 1975 liberalization of the standing The plaintiff, a minority shareholder in the claimed wrongdoing in cases where the par- requirements” to bring California in line with parent, alleged that the defendants breached ent company board’s decision not to enforce the majority rule.27 Framing the term within their fiduciary duties by converting corporate the subsidiary’s claim is unprotected by the the context of both the legal definition and funds of the subsidiary and that both the business judgment rule.”22 The Lambrecht that of usage in ordinary social discourse, parent and the subsidiary were controlled court further reasoned that double derivative Pearce stresses that a “liberal and expansive by the wrongdoers, who refused to sue. The standing arises “where the parent corpora- reading of section 800 and the phrase ‘share- plaintiff shareholder brought a derivative tion’s board is shown to be incapable of mak- holder…beneficially’” is proper.28 lawsuit on behalf of the parent and its sub- ing an impartial business judgment regarding Pearce holds that a beneficiary of corpus sidiary. The trial court refused to recognize whether to assert the subsidiary’s claim.”23 of a trust was a “beneficial stock owner” double derivative theory for the subsidiary’s The Lambrecht case, however, presented under Section 800(b), even though the ben- suit, the appellate court reversed, and the an even more complex issue. The Lambrecht eficiary did not personally own the corporate Illinois Supreme Court accepted the appeal. plaintiff had initially owned shares in the stock. In a subsequent case, Patrick v. Alacer The Illinois Supreme Court noted that a corporation at issue individually and directly, Corporation, the wife of a shareholder with “double derivative action is a long-standing and had properly filed a single derivative a community property interest in her hus- doctrine of equity jurisprudence” and the case on behalf of that nominal defendant band’s shares was deemed a beneficial owner “overwhelming weight of authority does corporation. During the litigation, the nom- with derivative standing, despite the fact the accept the double derivative action.”13 The inal defendant entity merged with another stock was not in her name.29 Thus, Section Illinois high court agreed with the plaintiff, corporation, thereby causing plaintiff to lose 800(b) expressly creates an exception to direct finding that “this court should not be derailed direct shareholder status. The court noted stock ownership, opening the door to the by convenient corporate formations which do that a “post-merger double derivative action” argument that a parent company shareholder not reflect business realities.”14 Illinois had a was “a new, distinct action in which stand- is a “beneficial” owner of the subsidiary’s well-settled principle to look beneath the cor- ing to sue double derivatively rests on a stock and, as such, expressly granted stand- porate veil and disregard legal fictions “when different temporal and factual basis—namely, ing by legislative enactment. used as a shield for wrongful acts.”15 The the failure of the [current] board, post-merg- Second, California’s creation of single court was more concerned with protecting the er, to enforce the premerger claim of its derivative law was initially based in equity,30 natural persons for whom the corporations wholly-owned subsidiary.”24 Despite the more and California strongly supports the “fun- were created rather than the “artificial crea- complicated ownership issues presented, the damental principle of our system of jurispru- tures in whom legal title is vested.”16 Delaware Supreme Court nevertheless con- dence that for every legal wrong there is a The Illinois Supreme Court was further firmed that “Delaware case law clearly en- remedy.”31 California compensates injured persuaded that corporate officers and direc- dorses the double-derivative action as a post- parties for all damage proximately caused tors are fiduciaries and that single-derivative merger remedy” and extended double- by the wrongdoer unless a departure from the standing evolved to ensure someone could derivative standing
Load more

Recommended publications
  • II. the Onset of Insolvency Or Financial Distress
    Reproduced with permission from Corporate Practice Series, "Corporate Governance of Insolvent and Troubled Entities," Portfolio 109 (109 CPS II). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com II. The Onset of Insolvency or Financial Distress A. Introduction Because a Chapter 11 reorganization can be expensive and time consuming, a troubled corporation may seek to right itself through an out-of-court transaction—such as a recapitalization, merger or asset sale. These transactions and the directors' decisions concerning them are analyzed under state corporation law. Corporation law also provides a state law alternative to a Chapter 7 liquidation through procedures for voluntary and forced dissolution as well as ancillary remedies such as the appointment of a receiver to marshal a corporation's assets, sell those assets, distribute the proceeds to creditors, and take other steps to wind down a corporation. That said, as discussed below, state law insolvency proceedings have limitations that often make them an unsuitable alternative to federal bankruptcy proceedings. B. Director Duties in the `Zone of Insolvency' and Insolvency As discussed in Chapter I, § 141(a) of the DGCL gives directors the authority and power to manage a corporation, and in exercising that authority directors are subject to the fiduciary duties of care and loyalty. Under ordinary circumstances, these fiduciary duties require that directors maximize the value of the corporation for the benefit of its stockholders, who are the beneficiaries of any increase in the value of the corporation. When a corporation is insolvent, however, the value of the corporation's equity may be zero.
    [Show full text]
  • Direct Versus Derivative and the Law of Limited Liability Companies Daniel S
    Mitchell Hamline School of Law Mitchell Hamline Open Access Faculty Scholarship 2006 Direct Versus Derivative and the Law of Limited Liability Companies Daniel S. Kleinberger Mitchell Hamline School of Law, [email protected] Publication Information 58 Baylor Law Review 63 (2006) Repository Citation Kleinberger, Daniel S., "Direct Versus Derivative and the Law of Limited Liability Companies" (2006). Faculty Scholarship. Paper 233. http://open.mitchellhamline.edu/facsch/233 This Article is brought to you for free and open access by Mitchell Hamline Open Access. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Mitchell Hamline Open Access. For more information, please contact [email protected]. Direct Versus Derivative and the Law of Limited Liability Companies Abstract The yh brid nature of limited liability companies causes us to re-invent, or at least re-examine, many doctrinal wheels. This Article will reexamine one of the most practical of those wheels-the distinction between direct and derivative claims in the context of a closely-held limited liability company. Case law concerning the direct/derivative distinction is still overwhelmingly from the law of corporations, although LLC cases are now being reported with some frequency. LLC cases routinely analogize to, or borrow from, the corporate law. This Article encompasses that law, analyzes LLC developments, and argues that courts should (i) avoid the "special injury" rule, (ii) embrace the "direct harm" approach, and (iii) engraft ot the direct harm approach an exception applicable when those in control of a limited liability company harm the company with the "purpose and effect" of injuring a particular member.
    [Show full text]
  • Overview of Shareholder Derivative Litigation
    CHAPTER 1 Overview of Shareholder Derivative Litigation Chapter Contents § 1.01 The Shareholder of the Modern Corporation § 1.02 The Shareholder Derivative Action: Definition [1] A Working Example of Shareholder Litigation [2] Defining the Derivative Suit and Distinguishing It from the Direct Action § 1.03 History [1] Early History [2] Derivative Suits Today § 1.04 Statutes Affecting Derivative Lawsuits [1] The Private Securities Litigation Reform Act [a] Purposes of the Reform Act [b] Provisions of the Reform Act [i] Reduction of Abusive Litigation [ii] Reduction of Coercive Settlements [iii] Auditor Disclosure of Corporate Fraud [2] Securities Litigation Uniform Standard Act (SLUSA) of 1998 [3] Evaluating the Impact of the PSLRA [4] The Sarbanes-Oxley Act of 2002 [5] The Dodd-Frank Wall Street Reform and Consumer Protection Act § 1.05 Nature of the Derivative Suit § 1.01 The Shareholder of the Modern Corporation It is beyond debate that the corporate form has emerged as one of the most frequently employed mechanisms through which to engage in business. This is driven largely by the fact that a corporation offers lim - ited liability, perpetual existence, and easy transferability of interests. 1-1 (Rel. 35) § 1.01 SHAREHOLDER DERIVATIVE LITIGATION 1-2 Given its current status, it is perhaps surprising that the corporation was once regarded with hostility and fear. As Justice Brandeis recog - nized in his dissent in Louis K. Liggett Co. v. Lee : “Although the value of this instrumentality [the corporation] in commerce and industry was fully recognized, incorporation for busi - ness was commonly denied long after it had been freely granted for religious, educational, and charitable purposes.
    [Show full text]
  • The Lost Lessons of Shareholder Derivative Suits
    Washington and Lee Law Review Volume 77 Issue 3 Article 5 Summer 2020 The Lost Lessons of Shareholder Derivative Suits Jessica Erickson University of Richmond School of Law, [email protected] Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Business Organizations Law Commons, and the Litigation Commons Recommended Citation Jessica Erickson, The Lost Lessons of Shareholder Derivative Suits, 77 Wash. & Lee L. Rev. 1131 (2020), https://scholarlycommons.law.wlu.edu/wlulr/vol77/iss3/5 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact [email protected]. The Lost Lessons of Shareholder Derivative Suits Jessica Erickson* Abstract Merger litigation has changed dramatically. Today, nearly every announcement of a significant merger sparks litigation, and these cases look quite different from merger cases in the past. These cases are now filed primarily outside of Delaware, they typically settle without shareholders receiving any financial consideration, and corporate boards now have far more ex ante power to shape these cases. Although these changes are often heralded as unprecedented, they are not. Over the past several decades, derivative suits experienced many of the same changes. This Article explores the similarities between the recent changes in merger litigation and the longer history of derivative suits. The trajectories of these lawsuits are not identical, but they nonetheless suggest larger lessons about shareholder litigation, including the predictable ways in which agency costs play out in the courtroom and at the settlement table.
    [Show full text]
  • SHAREHOLDER DERIVATIVE LITIGATION a Primer for Insurance Coverage Counsel
    SHAREHOLDER DERIVATIVE LITIGATION A Primer for Insurance Coverage Counsel By John D. Hughes, Gregory D. Pendleton and Jonathan Toren I. Introduction The recent spate of mergers, acquisitions, leveraged dividends and regulatory investigations has led to a much higher frequency of shareholder derivative actions. Shareholder derivative actions have unique and complicated procedural requirements which this article discusses in detail. Two other corporate procedures, books and records demands and special litigation committees, are frequent companions to shareholder derivative litigation. Accordingly, this article discusses these as well, and the important roles they play in the context of shareholder derivative litigation. Finally, the article also contains a discussion of the types of indemnification permitted under Delaware law, as well as how directors’ and officers’ insurance interacts with these indemnification provisions. II. Purpose of a Derivative Suit: Policing Behavior of Corporate Directors and Officers Corporate directors and officers owe the corporations they serve the fiduciary duties of loyalty and due care. When shareholders believe that either of these duties has been breached to the detriment of the corporation, the available remedy is a shareholder derivative suit. In other words, the purpose of a derivative suit is to redress damage done to the corporation by wayward directors and officers. See, e.g., La. Mun. Police Emples. Ret. Sys. v. Pyott, 46 A.3d 313, 340 (Del. Ch. 2012) (“A breach of fiduciary duty claim that seeks to hold directors accountable for the consequences of a corporate trauma is known colloquially as a Caremark claim [after]…In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del.
    [Show full text]
  • Still Standing
    MCLE ARTICLE AND SELF-ASSESSMENT TEST By reading this article and answering the accompanying test questions, you can earn one MCLE credit. To apply for credit, please follow the instructions on the test answer sheet on page 29. by Peter Zablotsky and Sa’id Vakili Still ST ANDING Defendants in shareholder derivative lawsuits are unlikely to disqualify plaintiffs who can meet ownership and demand requirements UNDER CALIFORNIA LAW, to qualify as separate direct and derivative claims and may An exception exists when the interests of a derivative plaintiff and institute an action maintain a direct action and a derivative the plaintiff in the direct action are so adverse on behalf of a corporation, the plaintiff must action.2 Nothing prevents shareholders from or in such conflict with the interests of the show: 1) status as a shareholder of record, enforcing their personal rights against the other shareholders that the plaintiff cannot holder of a beneficial interest, or holder or a corporation while simultaneously enforcing adequately represent the other shareholders. voting trust certificate, 2) shareholder status the rights of the corporation in a derivative For example, in Hornreich v. Plant Indus- at the time of the wrong to the corporation action. As the court held in Denevi v. LGCC, tries,6 which was prosecuted under the pro- giving rise to the action (the contemporane- one who has “suffered injury both as an visions of Rule 23.1,7 the plaintiff and his ous-ownership rule), and 3) that reasonable owner of a corporate entity and in an indi- brother sold their company to an independent effort was made to inform the corporate vidual capacity is entitled to pursue remedies corporation in exchange for shares of the directors about the action and induce them to in both capacities.”3 Typically, the personal latter’s corporate stock.
    [Show full text]
  • Indemnity and Infidelity: Advancement of Defence Costs in Actions "By
    INDEMNITY AND INFIDELITY: ADVANCEMENT OF DEFENCE COSTS IN ACTIONS "BY . THE CORPORATION" Pamela D. Pengelley* I. INTRODUCTION Indemnification of corporate directors refers to the financial protection provided by the corporation to its directors.1 It shields directors from expenses and liability of legal proceedings alleging breaches of their duty to the corporation.2 This is of concern for directors because, in addition to the potential liability they face if found blameworthy, the cost of funding an adequate defence can be staggering. To illustrate, since 2003, the Sun-Times Media Group Inc. (formerly Hollinger International Inc.) has paid U.S. $107.7 million in legal fees alone to defend Conrad Black and other former officers in the criminal lawsuit launched by the U.S. government, as well as a bevy of civil suits in Canada and the United States.3 Corporate pundits rightly regard liberal indemnification provisions as necessary to recruit capable management4 and to encourage directors to act on behalf of the corporation in a manner * Associate, Cozen O'Connor, Toronto, Ontario. The author would like to thank both Lawrence T. Bowman of Cozen O'Connor, Dallas, Texas and the anonymous reviewer for their helpful comments with earlier drafts of this article. Any errors are solely those of the author. 1. Committee on Corporate Laws, ªChanges in the Model Business Corporations Act Ð Amendments Pertaining to Indemnification and Advance for Expensesº (1994), 49 Bus. Law. 749 at p. 749. Although this article refers to ªdirectorsº, the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA) provisions respecting indemnity include ªofficersº as well, thus much of this article is applicable to the indemnification of corporate management generally.
    [Show full text]
  • Security for Expense Statutes: Easing Shareholder Hopelessness? Miriam R
    Maurice A. Deane School of Law at Hofstra University Scholarly Commons at Hofstra Law Hofstra Law Faculty Scholarship 2018 Security for Expense Statutes: Easing Shareholder Hopelessness? Miriam R. Albert Maurice A. Deane School of Law at Hofstra University Follow this and additional works at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship Part of the Law Commons Recommended Citation Miriam R. Albert, Security for Expense Statutes: Easing Shareholder Hopelessness?, 24 Fordham J. Corp. & Fin. L. 33 (2018) Available at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship/1222 This Article is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Faculty Scholarship by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. SECURITY FOR EXPENSE STATUTES: EASING SHAREHOLDER HOPELESSNESS? Miriam R. Albert* ABSTRACT The quintessential derivative suit is a suit by a shareholder to force the corporation to sue a manager for fraud, which is admittedly an awkward and likely unpleasant endeavor and, according to the Supreme Court, a “remedy born of stockholder helplessness.”1 Where ownership and control of an enterprise are vested in the same population, the need for a corrective mechanism like a derivative suit is greatly lessened because the owner/managers’ self-interests will arguably guide managerial conduct. But where ownership and control are in separate hands, the incentives change, and managerial conduct may not conform to the owners’ views of the best course of action. This may lead to what the owners consider to be director misconduct.
    [Show full text]
  • The Role of Liability Rules and the Derivative Suit in Corporate Law: a Theoretical and Empirical Anaylsis
    University of Chicago Law School Chicago Unbound Journal Articles Faculty Scholarship 1986 The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Anaylsis Daniel R. Fischel Michael Bradley Follow this and additional works at: https://chicagounbound.uchicago.edu/journal_articles Part of the Law Commons Recommended Citation Daniel R. Fischel & Michael Bradley, "The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Anaylsis," 71 Cornell Law Review 261 (1986). This Article is brought to you for free and open access by the Faculty Scholarship at Chicago Unbound. It has been accepted for inclusion in Journal Articles by an authorized administrator of Chicago Unbound. For more information, please contact [email protected]. SYMPOSIUM THE ROLE OF LIABILITY RULES AND THE DERIVATIVE SUIT IN CORPORATE LAW: A THEORETICAL AND EMPIRICAL ANAYLSIS Daniel R. Fischelt and Michael Bradley 1 I INTRODUCTION Liability rules create incentives to engage in socially desirable conduct. Tort rules, for example, are beneficial because they create incentives for automobile drivers to drive more carefully than they otherwise would. This characteristic of liability rules has led many to argue that such rules should be more frequently utilized in the publicly-held corporation to minimize divergences of interest be- tween managers and investors.' Proposals have included expanding both the duty of care and the duty of loyalty; these proposals would expand the potential legal liability which corporate managers face. t Professor of Law, University of Chicago. B.A. 1972, Cornell University; M.A. 1974, Brown University; J.D. 1977, University of Chicago.
    [Show full text]
  • Removing Nevada Derivative Litigation to Federal Court
    Portfolio Media. Inc. | 111 West 19th Street, 5th Floor | New York, NY 10011 | www.law360.com Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | [email protected] Removing Nevada Derivative Litigation To Federal Court Law360, New York (March 3, 2017, 11:25 AM EST) -- In a case noteworthy for companies incorporated in Nevada, a recent decision by the U.S. District Court for the District of Nevada paved the way for defendants in shareholder derivative lawsuits, brought in Nevada state court and asserting state law claims, to remove the litigation to federal court. The Nevada district court in Gartner ruled, for the first time in the Ninth Circuit, that a company in a shareholder derivative lawsuit — although considered a nominal defendant — can be aligned with, and effectively deemed, a plaintiff for purposes of, and thus easing, removal to federal court.[1] The advantages of litigating in a federal forum can include, for example, greater amenability to a stay of discovery pending a motion to dismiss or a bench with wider exposure to corporate governance matters. We discuss the Sameer Rastogi Gartner decision and its implications in this article. Companies incorporated in foreign states — for example, Delaware[2] and, increasingly, Nevada — face steep legal hurdles in removing shareholder derivative lawsuits, which typically only assert state-based claims and are commenced in the state of incorporation, to the appropriate federal forum. Upon defendants’ removal on diversity grounds, plaintiffs often move to remand on the basis of the “forum defendant rule.” This rule prevents defendants from removing a case to federal court if at least one defendant is a citizen of the forum state.
    [Show full text]
  • Conflicts Inherent in Shareholder Derivative Actions
    March2012_ Master.qxp 2/13/12 1:58 PM Page 20 by SA’ID VAKILI CORPORATIONSIN CONFLICT The potential for conflicts of interest in shareholder derivative lawsuits is high, leading to complex issue for courts and attorneys to resolve SHAREHOLDER DERIVATIVE LAWSUITS the most important are the potential con- and its shareholders and with such care, have not diminished. Indeed, in industries flicts between the shareholder and the cor- including reasonable inquiry, as an ordinar- such as finance and technology, the number poration, between the plaintiff shareholder ily prudent person in a like position would use of these lawsuits is growing.1 A shareholder and other shareholders, and between the cor- under similar circumstances.”4 In addition to derivative suit is typically an action by one or poration and its counsel. Some of these poten- the duty of care, directors also owe a fiduciary more shareholders against some or all of the tial conflicts may also pose ethical challenges duty of loyalty to the corporation they serve. officers or directors of a corporation to redress to the attorneys involved. “Loyalty” means placing corporate and share- corporate mismanagement. While the cor- Although myriad acts can underlie a claim, holder interests ahead of any other business poration itself is usually named as a defen- shareholder derivative actions usually emerge or personal interests.5 dant, its status as defendant is nominal. In as a result of breaches of fiduciary duties by Discharging these obligations requires the practice, the interests of the shareholder and officers or directors. These duties, long rec- exercise of sound business judgment.
    [Show full text]
  • Direct Vs. Derivative, Or "What's a Lawsuit Between Friends in an 'Incorporated Partnership'?" Daniel S
    Mitchell Hamline School of Law Mitchell Hamline Open Access Faculty Scholarship 1996 Direct vs. Derivative, or "What's a Lawsuit Between Friends in an 'Incorporated Partnership'?" Daniel S. Kleinberger Mitchell Hamline School of Law, [email protected] Publication Information 22 William Mitchell Law Review 1203 (1996) Repository Citation Kleinberger, Daniel S., "Direct vs. Derivative, or "What's a Lawsuit Between Friends in an 'Incorporated Partnership'?"" (1996). Faculty Scholarship. Paper 223. http://open.mitchellhamline.edu/facsch/223 This Article is brought to you for free and open access by Mitchell Hamline Open Access. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Mitchell Hamline Open Access. For more information, please contact [email protected]. Direct vs. Derivative, or "What's a Lawsuit Between Friends in an 'Incorporated Partnership'?" Abstract In any context the distinction between direct and derivative claims carries significant consequences. The procedural requirements are different, as are the available remedies. In addition, the remedies benefit different parties. A successful derivative claim typically enriches the corporate treasury, while a successful direct claim typically puts money directly in the hands of the shareholder claimant. Moreover, derivative defendants can shelter behind several powerful bulwarks-including special litigation committees and the business judgment rule-that are unavailable to direct defendants. Under the 'internal affairs' doctrine, Minnesota law governs the direct/derivative issue for all Minnesota corporations. Current Minnesota law provides inadequate guidance when the corporation is closely held. The inadequacy has two main sources. First, the Minnesota rule for distinguishing between direct and derivative claims in general contains a serious conceptual flaw which confuses analysis regardless of the number of shareholders.
    [Show full text]