Shareholder Derivative Litigation: Besieging the Board

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by Ralph C. Ferrara, edited by Julia D. Pizzi

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Written for both the expert and the novice, this book not only reviews the legal framework for derivative actions but also provides a practical guide to the application of legal principles. Shareholder Derivative Litigation: Besieging the Board reviews each of the legal doctrines relevant to derivative actions, including the demand and standing requirements, potential board responses to demands, the use of special litigation committees, procedural issues in derivative litigation and the business judgment rule's application to derivative litigation.

This comprehensive legal study features an up-to-date listing of state derivative action statutes and rules, plus analysis of other significant developments, such as the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act on shareholder derivative litigation and recent case law concerning the demand requirement and attorneys' fees. It also delivers a wealth of useful working tools, including an easy to follow flow chart, relevant code sections and model forms.

Book #00631; looseleaf, one volume, 986 pages; published in 1995, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-344-0

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 986
  • ISBN: 978-1-58852-344-0
  • Pub#/SKU#: 631
  • Volume(s): 1

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  • Ralph C. Ferrara

Ralph C. Ferrara is a litigator in the Washington, DC office of Proskauer Rose LLP.  His practice includes a wide range of litigation, business, regulatory and corporate governance matters. Here presents corporations and individuals in complex securities class and shareholder derivative actions as well as contested mergers and acquisitions;advises corporate clients on Securities and Exchange Commission reporting and disclosure requirements; represents corporations and individuals in government investigations and enforcement proceedings; conducts corporate internal investigations; handles consumer financial services issues; and counsels corporate officers and boards on all of these matters. Ralph has appeared five times before the United States Supreme Court on cases, appeared in each of the Federal Circuit Courts of Appeal and represented clients in state and federal courts across the country. In addition to these accomplishments, Ralph has written extensively on corporate law matters. His treatises are as follows:“Debt Despair & Deliverance: Commentary and Analysis on The Consumer Financial Protection Bureau,” “Consumer Financial Protection Bureau Reporter with Practice Commentary and Analysis,” 4 volumes, “Takeovers: A Strategic Guide to Mergers and Acquisitions,” “Ferrara on Insider Trading and the Wall,” “Takeovers: Strategic Guide to Mergers & Acquisitions,” “Securities Practice: Federal and State Enforcement,” “Managing Marketeers: Supervisory Responsibilities of Broker-Dealers 2nd Investment Advisers,” “Shareholder Derivative Litigation: Besieging the Board,” “Ferrara on Insider Trading and the Wall,” “Takeovers II: A Strategist's Manual for Business Combinations in the 1990s,” “Beyond Arbitration: Designing Alternatives to Securities Litigation,” “Stockbroker Supervision: Managing Stockbrokers and Surviving Sanctions,” “Redeeming Fallen Brokers: Managing the Aftermath of Broker-Dealer Enforcement Proceedings,” and “Takeovers: Attack & Survival.” In recognition of his achievements, he has been chosen as one of the country's leading lawyers in nine categories in the 2014 edition of The Best Lawyers in America, a status shared by only 100 of the 50,000 lawyers globally recognized by The Best Lawyers in America.


Also by Ralph C. Ferrara:
Ferrara on Insider Trading and The Wall

Author Image
  • Julia D. Pizzi

Julia Pizzi is an associate in the Litigation Departmentof of Proskauer Rose LLP. Julia focuses her practice on securities andcorporate governance litigation. She has experience in complex litigationmatters, including securities class actions and related individual andderivative actions. She also represents clients in international commercialarbitrations and general commercial disputes.

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

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

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 

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 

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

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 

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 

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 

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

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 

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


§ 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 

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 


§ 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

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 

Table of Cases
Table of Abbreviations