Strategic Issues in Derivative Litigation Representation
Lane Powell Shareholder Doug Greene authored a March 3 Law360 article titled “Strategic Issues in Derivative Litigation Representation.” In the article, Greene discussed the potential wave of shareholder derivative litigation, which is a shareholder’s assertion of a claim belonging to the corporation, typically brought against directors and officers, alleging corporate harm for a board’s failure to prevent corporate problems. He also discussed some issues that are unique to derivative litigation, including the key issue of representation: “Which lawyers can and should represent the company and the individual defendants in derivative litigation?”
Because a derivative litigation claim belongs to the corporation, it puts the corporation in an odd spot. A shareholder, as one of the corporation’s “owners” (usually a really, really small owner — but an owner nevertheless), is trying to force the company to bring a claim against the people who run the company.
The law says, however, that those people, the directors, get to decide whether the company should sue someone — including themselves — unless a shareholder can show that they couldn’t make a disinterested and independent decision. Thus, to bring a derivative action, a shareholder must allege that it would have been futile to demand that the board take action, and defendants will typically challenge the lawsuit with a motion to dismiss for failure to make a demand (“demand motion”) on the basis that the demand-futility allegations aren’t sufficiently probative or particularized.