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Publication Date

2016

Abstract

The most fundamental and perplexing question in all of corporate law is how to ensure that the board of directors and corporate officers faithfully serve the interests of the corporation and its owners, the shareholders. A primary means of answering that challenge has been the implication and enforcement of directors' and officers' fiduciary duties to the corporation by means of the shareholder derivative action. Almost from its inception, however, the derivative suit has been subject to jaundiced treatment by companies, legislatures, and courts. The result is a costly, tortured derivative suit process unrelated to the merits of the underlying claims or any potential remediation. Simply put, the state of the derivative suit process today reflects both bad corporate governance and inefficient public policy. This Article proposes a transformation of how derivative litigation is handled in the United States today. A recommended federal status posits three fundamental reforms to the derivative claim process. The first reform is a universal demand requirement to recognize board autonomy and provide a means for alternative dispute resolution of corporate claims. The second reform is an expansion of the conception of the special litigation committee. This reform would allow the subject board of directors to name a committee composed of independent persons, not current directors, to investigate the derivative claim and determine how it should be resolved. In this manner, concern over structural bias in the derivative claims process can be modified. The third reform places the various standards of review currently employed by the courts with an explicit delineation of the standards to be used by the courts in reviewing any action by the company to reject, settle or terminate the derivative claim. The statutory solution proposed here both remedies the current derivative suit dysfunction and also provides a means of effectively meeting the derivative suit's original and still crucial purpose of providing a necessary means for holding corporate boards and officers accountable.

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