Introduction written by Tanya Dmitronow and Julia Pizzi. Full analysis written by Sarah Gold and Richard Spinogatti.
Although they often involve overlapping issues, shareholder derivative lawsuits are fundamentally different from securities class actions. While the object of a securities class action is to hold the company (and, perhaps, its directors and officers) liable for harming investors and obtain money from the company (or others) as a result, a derivative action seeks relief for the company by asserting the company's own claim against its directors, officers, and/or third parties. In other words, a securities class action is a contingent liability from the company's perspective, but a derivative action is a contingent asset.
Because the claims at stake in a derivative action are the company's, it is up to the company to determine whether to assert them. Thus, a shareholder wishing to file a derivative action will either (i) first make a demand on the company's board requesting that the company take action regarding the underlying misconduct, or (ii) allege in a derivative complaint that the company could not have properly considered the demand. This latter option, known as "demand futility," allows a shareholder to bypass the company's initial review of the derivative claims, on the grounds that the board could not have exercised independent and disinterested business judgment in evaluating a demand.
As one might expect, the Delaware courts have established comprehensive analyses on shareholder derivative actions in general, and the demand futility requirements in particular. Although this law is well-developed and courts often defer to Delaware based on this expertise, the same allegations can sometimes result in a finding of demand futility in one jurisdiction but not in another. The below article illustrates this issue, as seen in a recent shareholder derivative case involving the manufacturer of Botox Cosmetic that was pursued in parallel proceedings in Delaware and California.
Continue Reading the full analysis written by Sarah Gold and Richard Spinogatti.
Demand Futility In Delaware Derivative Actions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
