CHAPTER 1
Overview of Shareholder Derivative Litigation
§ 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 (PSLRA)
[2] Securities Litigation Uniform Standard Act (SLUSA) of 1998
[3] The Sarbanes-Oxley Act of 2002
[4] The Dodd-Frank Wall Street Reform and Consumer Protection Act
[5] Corporate Bylaws
§ 1.05 Nature of the Derivative Suit
CHAPTER 2
The Role of the Delaware Court of Chancery in Shareholder Derivative Litigation
§ 2.01 Introduction
§ 2.02 The Birth of Delaware’s General Corporations Law
§ 2.03 The Role of the Delaware Court of Chancery
[1] Influence of English Courts of Equity
[2] Establishment and Growth of Equity Jurisprudence in Delaware
§ 2.04 Conclusion
CHAPTER 3
The Role of the Business Judgment Rule in Derivative Suits
§ 3.01 In General
[1] The Business Judgment Rule Defined
[2] The Entire Fairness Standard
[3] The Effect of Shareholder Ratification on Entire Fairness Analysis
[4] The Contemporary Reexamination of the Business Judgment Rule
§ 3.02 Rationale for the Business Judgment Rule
§ 3.03 Elements of the Business Judgment Rule
[1] Exercise of Business Judgment
[2] The Duty of Loyalty
[3] The Duty of Due Care
[4] “Good Faith” or “In the Best Interests of the Corporation”
§ 3.04 Fiduciary Duties in Context of Change of Corporate Control
[1] Unocal and the Creation of the Change of Control Doctrine
[2] Revlon Duties
[3] Toys “R” Us
[4] Confidentiality Agreements—Martin Marietta Materials, Inc. v. Vulcan Materials Co.
§ 3.05 Fiduciary Duties and Controlling Stockholder Freeze-Outs
[1] Controlling Shareholder Freeze-Outs: What Standard of Review Applies?
[2] Derivative or Direct Claims
[3] Entire Fairness Review in Non-Merger Contexts
§ 3.06 The Business Judgment Rule in the Context of Derivative Litigation
CHAPTER 4
The Demand Requirement and Other Prerequisites to Shareholder Derivative Litigation
§ 4.01 In General
§ 4.02 Purpose of the Demand Requirement
§ 4.03 Adequacy of the Demand
[1] Alerting the Board of Directors
[2] Content of the Demand
[3] Assistance of the Shareholder
[4] Time to Respond to the Demand
§ 4.04 Demand on Shareholders
§ 4.05 Choice of Law Considerations
[1] Federal Court Actions
[2] State Court Actions
[3] Choice of Law Issues Surrounding Demand on Shareholders
[4] Effect of Forum Selection Bylaws on Derivative Plaintiffs
[5] Choice of Law Issues for Hedge Funds
§ 4.06 Survey of State Demand Requirements
§ 4.07 The Universal Demand Requirement
§ 4.08 The Standing Requirement
[1] Stock Ownership at the Time Suit Is Commenced
[2] Stock Ownership at the Time of the Conduct Being Challenged
[3] Exceptions to the Contemporaneous Ownership Rule
[4] Equitable Standing
[5] Effect of Merger on Standing to Sue Derivatively
[6] Effect of Bankruptcy on Shareholder Standing
[7] Shareholder Standing Following Initial Public Offerings
[8] Minimum-Stake-to-Sue Bylaws
[9] Double (and Multi-Tier) Derivative Actions
§ 4.09 Fair and Adequate Representation
[1] In General
[2] Factors Considered
§ 4.10 Security-for-Expense Statutes
§ 4.11 Corporation’s Ability to Recover Expenses
CHAPTER 5
Demand Futility
§ 5.01 In General
§ 5.02 Pleading Demand Futility
§ 5.03 Applicable Legal Standards
[1] The Delaware Test: Aronson and Rales
[2] The New York Test
[3] The Maryland Test
[4] The Indiana Test
§ 5.04 Common Grounds for Allegations of Demand Futility
[1] Naming Directors as Defendants
[2] Approval or Acquiescence
[3] Financial Interest as an Impediment to Independence
[4] Entrenchment
[5] Insured Versus Insured Exclusion
[6] Threat of Personal Liability
[7] Domination and Control
[8] Personal Friendships and Outside Business Relationships
[9] Philanthropic Relationships
[10] Lack of Due Care
[11] Claims of Waste
[12] Establishment of a Special Litigation Committee
[13] Activity After Suit Is Filed
[14] Executive Compensation
[15] Allegations of Illegal Activity and Bad Faith
§ 5.05 Effects of a Demand Futility Dismissal
[1] Demand Futility Allegations and Issue Preclusion
[2] Privity Between Multiple Shareholders
[3] Adequacy of Representation
§ 5.06 Appellate Review of Demand Futility Determinations
§ 5.07 Demand Futility and the 2008 Financial Crisis
[1] Citigroup and the Failure to Monitor Risks
[2] Dow, Goldman Sachs, and the Reaffirmation of the Business Judgment Rule
CHAPTER 6
Board Responses in Demand-Required Cases
§ 6.01 In General
§ 6.02 The Wrongful Refusal Rule
§ 6.03 Inspection of Books and Records Under Section 220
[1] Proper Purpose
[2] Scope of Inspection
[3] Standing
[4] Judicial Limitations on Books and Records Actions
[5] Effect of Section 220 Demand Requestor’s Identity
[6] Books and Records Demands in Other Jurisdictions
§ 6.04 The Modified Business Judgment Rule in Wrongful Refusal Cases
§ 6.05 Demand as Concession of Independence
§ 6.06 Lack of Due Care or Good Faith as a Basis for Wrongful Refusal
[1] Reasonableness of Investigation
[2] Good Faith
[3] Independence of Counsel
§ 6.07 Use of a Committee to Review Demand
§ 6.08 Consideration of Factors Other Than the Merits in Reviewing a Demand
CHAPTER 7
Board Responses in Demand-Excused Cases: The Special Litigation Committee
§ 7.01 In General
§ 7.02 Judicial Treatment of Special Litigation Committees
[1] The New York Rule
[2] The Delaware Rule
[3] The Massachusetts Approach
[4] The Second Circuit Approach
[5] The Iowa Rule
[6] The North Carolina Rule
[7] The New Jersey Rule
§ 7.03 The Theory of Structural Bias
§ 7.04 Statutory Responses to Special Litigation Committees
§ 7.05 Independence, Good Faith and Due Care: Characteristics of an Adequate Special Litigation Procedure
[1] Independent Committee
[2] Adequate Procedures
[3] Thorough Consideration of Potential Claims
[4] Stays and Timing of the Special Litigation Committee’s Review
§ 7.06 The ALI Approach and the Future of the Delaware Two-Step
CHAPTER 8
Special Issues with Outside Director Liability
§ 8.01 Introduction
§ 8.02 In re Walt Disney Company Derivative Litigation
[1] Breach of Fiduciary Duty
[2] Allegations of Egregious Director Misconduct
[3] Exception to the Business Judgment Rule
§ 8.03 In re Emerging Communications, Inc. Shareholders Litigation
[1] Theory of the Case: Fairness Standard of Review
[2] Unfair Dealing: Specialized Financial Expertise
[3] Breaches of Fiduciary Duty and Loyalty
§ 8.04 Integrated Health Services, Inc. v. Elkins
[1] Outside Director Misconduct and Personal Liability
[2] Duty of Loyalty
§ 8.05 In re Oracle Corporation Derivative Litigation
[1] Misappropriation of Inside Information
[2] Heightened Scrutiny
§ 8.06 Disney’s Impact on Settlements of Shareholder Derivative Litigation
[1] Enron
[2] Worldcom
§ 8.07 The Road Forward: Recent Conceptions of Outside Directors’ Liability
CHAPTER 9
Procedural Issues in Derivative Litigation
§ 9.01 In General
§ 9.02 Federal Subject Matter Jurisdiction
[1] Diversity Jurisdiction
[2] Amount in Controversy for Purposes of Diversity Jurisdiction
§ 9.03 Personal Jurisdiction
§ 9.04 Venue and Process
§ 9.05 Verification of the Complaint
§ 9.06 Right to a Jury Trial
§ 9.07 Discovery
§ 9.08 Statutes of Limitations
CHAPTER 10
An Overview of the Attorney-Client Privilege and Work Product Doctrine
§ 10.01 Setting the Stage
§ 10.02 The Attorney-Client Privilege: Background and Definition
§ 10.03 The Attorney-Client Privilege in the Corporate Context
[1] Application of the Attorney-Client Privilege to Corporations
[2] Scope of the Attorney-Client Privilege in the Corporate Context
[3] Attorney-Client Privilege for Communications That Include an Investment Banker
§ 10.04 Exceptions to the Attorney-Client Privilege
[1] The Fiduciary Exception
[2] The Crime-Fraud Exception
[3] Other Exceptions
§ 10.05 Waiver of the Attorney-Client Privilege
[1] The Corporate Client
[2] Implied Waiver in General
[3] Disclosure to Government Agencies
[4] Disclosure to Insurance Carriers
[5] Disclosure to Outside Auditors
[6] Inadvertent Disclosure
[7] Reliance on Advice of Counsel
[8] Effect of Waiver by Corporation on Corporate Officers or Employees
§ 10.06 The Work Product Doctrine
§ 10.07 Exceptions to and Waiver of the Work Product Doctrine
[1] Exceptions to the Work Product Doctrine
[2] Waiver of Work Product Protection
§ 10.08 The Self-Evaluative or Self-Critical Analysis Privilege
CHAPTER 11
Special Issues Regarding the Attorney-Client Privilege and Work Product Doctrine in Shareholder Derivative Litigation
§ 11.01 In General
§ 11.02 Development of the Fiduciary Exception
§ 11.03 Application of the Fiduciary Exception
[1] Generally
[2] Expansion of the Garner Fiduciary Exception Beyond Derivative Actions
[3] Criticism of the Garner Fiduciary Exception
§ 11.04 Application of the Fiduciary Exception in the Derivative Context
§ 11.05 Application of the Fiduciary Exception in the Class Action Context
[1] Distinguishing Derivative Actions from Class Actions
[2] Invocation of the Exception by “Purchasers” as Opposed to Shareholders
§ 11.06 Invoking the Protections of Either the Attorney-Client Privilege or the Work Product Doctrine in the Derivative Context
[1] Mandated Disclosure
[2] Lack of Good Faith in Conducting an Internal Investigation
CHAPTER 12
Indemnification
§ 12.01 In General
§ 12.02 Statutory Indemnification
[1] Indemnification Statutes Generally
[2] Prerequisites to Statutory Indemnification
[3] Mandatory Indemnification by Statute
§ 12.03 Mandatory Indemnification by Charter, By-law, or Agreement
§ 12.04 Permissive Indemnification
[1] Conditions Precedent to Permissive Indemnification
[2] Limitations on Permissive Indemnification
[3] Corporate Authorization of Indemnification
§ 12.05 Non-Exclusivity Provisions and the Public Policy Limitation
§ 12.06 Court-Ordered Indemnification
§ 12.07 Disclosure of Indemnification
§ 12.08 Indemnification and the Federal Securities Laws
§ 12.09 Advancement of Expenses
[1] Timing of Advancement
[2] Non-Exclusivity of Advancement Rights
§ 12.10 Advancement of Expenses to Former Officers and Directors
CHAPTER 13
D&O Liability Insurance
§ 13.01 In General
§ 13.02 Enabling Statutes
§ 13.03 Basic Features of a D&O Liability Policy
[1] The Insuring Clauses
[2] “Claims-Made” Policy
§ 13.04 Defined Terms
[1] “Wrongful Act”
[2] “Loss”
§ 13.05 Exclusions
[1] Insured Versus Insured
[2] Antitakeover Exclusion
[3] Prior or Pending Litigation
[4] Fraud
§ 13.06 Reporting and Notice
[1] Claim Reporting Requirement
[2] The Occurrence Exception to the Claims-Made Rule
[3] Discovery Period
§ 13.07 Defense of Actions
[1] Advancement of Defense Expenses
[2] Allocation of Settlement Costs and Defense Expenses
[3] Settlement
[4] Recoupment of Defense Costs
§ 13.08 Excess Coverage
§ 13.09 Cancellation and Rescission
[1] Cancellation
[2] Rescission
§ 13.10 Liability Limiting Statutes
CHAPTER 14
Settlement
§ 14.01 In General
§ 14.02 Notification of Shareholders
[1] Notification Requirement
[2] Adequacy of Notice
§ 14.03 Preclusive Effect of Settlement
§ 14.04 Objectors
[1] Standing of Shareholders to Object and Appeal
[2] Discovery by Objector
§ 14.05 Legal Standards for Reviewing Proposed Settlements
[1] Establishing a Presumption of Fairness
[2] Factors to Be Considered When Settlement Is Accorded Initial Presumption of Fairness
§ 14.06 Attorneys’ Fees and Incentive Awards
[1] Attorneys’ Fees in General
[2] Making Plaintiff’s Counsel Earn Their Fees
[3] Attorneys’ Fees When Defendants’ Action Renders the Litigation Moot
[4] Allocating Attorneys’ Fees Among Plaintiffs’ Counsel
[5] Incentive Awards to Plaintiffs
[6] In re Riverbed Technology: A Sea Change in Shareholder Litigation Settlements?
§ 14.07 Special Settlement Committees and Board Decisions to Settle
§ 14.08 Considerations Regarding Representation in Settlement Negotiations
[1] The Need for Separate Corporate and Individual Counsel in Derivative Actions
[2] The Need for Separate Corporate and Individual Counsel in Successive Representations
CHAPTER 15
Practical Considerations
§ 15.01 Introduction
§ 15.02 Identifying a Derivative Demand
§ 15.03 Initial Response to a Demand Letter
[1] Notification of the Company’s Insurance Carrier
[2] Communicating with the Demanding Shareholder
§ 15.04 An Overview of the Formation of a Committee of the Board to Consider Derivative Claims
§ 15.05 Formation of a Committee of the Board to Consider a Demand
§ 15.06 Formation of a Committee of the Board After a Lawsuit Is Filed with No Pre-Suit Demand Having Been Made
§ 15.07 The Investigation of the Committee of the Board
[1] Retention of Counsel
[2] Scope of the Committee’s Review
[3] Role of the Committee in the Investigative Process
[4] Document Collection and Review
[5] The Witness Interview
§ 15.08 Meeting with Shareholder’s Counsel
§ 15.09 Reporting the Results of the Committee’s Investigation
[1] Reporting in the Demand-Required Context
[2] Reporting in the Demand-Excused Context
§ 15.10 Conclusion of a Derivative Proceeding
[1] Conclusions of the Board After the Recommendation Is Made by an Evaluation Committee
[2] Conclusions of an Empowered Committee
§ 15.11 Settlement of a Derivative Proceeding
[1] Structuring a Settlement
[2] The Memorandum of Understanding
[3] Involvement of the Insurance Carrier
[4] Conducting Confirmatory Discovery
[5] The Final Settlement Agreement
[6] Notice to Shareholders
[7] Obtaining Final Approval of the Settlement
§ 15.12 Insurance Considerations
Appendices
Table of Cases
Table of Abbreviations
Index