Corporations (Shareholder Suits)

Front 1

Shareholder Suits

(General)

SH’s can sue in two ways

Back 1

Direct action & Derivative Action

Front 2

Shareholder Suits

Direct Lawsuit

If the cause of action belongs to

Back 2

the SH

1. A SH can’t enforce corp rights in a direct action
2. A direct action can be brought either when there is a special duty, such as a contractual duty, between the wrongdoer and the SH, or when the SH suffers injury separate and distinct from that suffered by other SH’s
3. A claim for which the P is asking only equitable relief and not monetary recovery is more likely to be classified as direct
4. If the wrong is a wrong form a controlling SH towards a non-controlling SH, then it is a direct claim because the SH is harmed differently

Front 3

Shareholder Suits

Derivative Lawsuit

A SH sues on behalf of

Back 3

the corp

1. One in which the gravamen of the complaint is injury to the corp, or to the whole body of its stock or property, without any severance or distribution among individual SH’s
2. Without this procedure, management’s fiduciary duties to the corp would be virtually meaningless if the board’s control extended to all litigation decisions because it would be rare that managers would actually sue themselves

Front 4

Shareholder Suits

Distinctions Between Derivative and Direct Actions

Back 4

Theoretical Distinction
a. Since the corp is a legal person separate from its SH’s, an injury to the corp isn’t an injury to its SH’s

Pragmatic Distinction
a. To avoid multiplicity of suits by each injured SH
b. To protect the corp creditors
c. To protect all SH’s since corp recover benefits all eqully

Front 5

Shareholder Suits

Close Corporations

In the case of a closely held corp, the court in its discretion, may treat an action raising derivative claims as

Back 5

a direct action

2. If so, then exempt are those restrictions and defenses only applicable to derivative actions

3. An order of individual recovery may be granted if the court finds that to do so would not:
a. Unfairly expose the corp or the D’s to a multiplicity of actions, or
b. Materially prejudice the interests of creditors of the corp, or
c. Interfere with a fair distribution of the recovery among all interested persons (ALI Principles of Corp Governance §7.01)

4. Note that DE isn’t a state that allows for direct actions even if close corps are involved