United States: New Support For Joint Representation Of Company And Directors In Derivative Litigation

Last Updated: February 20 2015
Article by William S. Freeman

When a shareholder seeks, by derivative litigation, to hold a corporation's officers or directors liable to the company, one of the first questions that arises for company counsel is whether the company and the individual defendants need separate counsel. A recent opinion from the Northern District of California confirms that, at least at the outset, the company and the individual defendants may be jointly represented. The decision in Voss v. Sutardja1 shines a welcome ray of light into an otherwise murky area and provides useful guidance to company counsel.

At first blush, the answer to the question might seem straightforward. Since the complaint seeks to have the company serve as a plaintiff and recover damages from the individuals, the interests of the company and the individuals seem unalterably opposed. Many reported decisions reflexively suggest that separate representation is required. In one notable case, a federal district court, citing "a substantial body of authority proscribing dual representation of corporate and individual defendants in a derivative action," refused to approve the settlement of a derivative case—even though plaintiffs' and defendants' counsel both supported it—because the company was not represented by counsel independent of the attorneys for the individual defendants.2 In a leading case in California, the court upheld the disqualification of an attorney from representing a closely held corporation in derivative litigation in which the attorney was also representing the directors, who had been accused of embezzlement.3 The court expressed the view that this result was required in cases where directors were accused of fraud, and it also held that the conflict of interest could not be waived by the corporation, because the corporation could give consent only through the defendant directors.4

The problem with requiring separate representation at all stages of all cases, however, is that it ignores some important practical considerations of derivative litigation. These considerations suggest that, at least at the outset of some cases, the interests of the company and the defendant directors or officers may very well be aligned. If this is so, it ought to be permissible for one attorney to represent both sets of clients jointly.

From the point of view of the company's internal or external counsel, the first step in analyzing the representation issue is to look at the interests of the respective parties. The individual defendants will, of course, be opposed to the litigation and in favor of obtaining a dismissal as promptly as possible. But what about the company? It turns out that the company may well have entirely defensible reasons to oppose the litigation as well.

By definition, derivative litigation seeks to force a company to do two things that it may not want to do: sue its own officers or directors, and turn the control of that suit over to an attorney over whom the company has no control. A corporation's board normally enjoys the power to decide whether to assert claims on behalf of the company against those, including the company's own officers and directors, who may have harmed the company; the derivative case seeks to wrest this power from the board. Delaware and many other jurisdictions protect this power by requiring that before a shareholder can sue in the company's name, he or she must make a formal demand on the board to initiate the action itself. Presentation of the demand gives the board the opportunity to investigate the alleged claim and to make a decision as to whether or not the company should seek relief on its own, permit the shareholder to pursue the action on behalf of the company, or decline to take action. If the board's decision is later challenged in court, the court will often review the board's action under the relatively deferential "business judgment rule" standard.

A shareholder can circumvent the demand requirement by establishing that demand would be futile because the board is incapable of objectively evaluating whether to sue its own members or company management. To demonstrate "demand futility," the shareholder plaintiff must plead specific facts that tend to demonstrate the inability of a majority of the board to consider the action impartially. Simply alleging that "the board cannot be expected to sue itself" is generally not enough.

The company may have good reason to decide that suing its own officers or directors is not in the company's best interest. The board may conclude that the proposed action is a meritless "strike suit," or perhaps that, even if the claim has some merit, there are sound business reasons why asserting it is would not be advantageous. At a practical level, the company may want to insist on its right to decide for itself whether a suit should be filed. It may also believe that the claim of "demand futility" is not legally sufficient. Under these and other circumstances, the company may decide to fight an allegation of demand futility on purely procedural grounds, arguing that the plaintiff has not met the requirement to plead specific facts. (If a dismissal is granted for the plaintiff's failure to demonstrate demand futility, the plaintiff may still be able to make demand on the board.)

The interests of the company and the director defendants may, therefore, be aligned, at least at the outset of the case. The individuals desire to defeat the claims against them, and the company wishes to oppose the shareholder's attempt to circumvent the board's authority to control purported claims belonging to the company. Under these circumstances, it should be permissible for the same counsel to advocate dismissal on behalf of both sets of parties. The Delaware Chancery Court, recognizing this reality, has approved the practice of permitting one firm to jointly represent the company and the individual defendants at the motion to dismiss stage.5 California courts, by contrast, have not expressly approved this practice.6

Under this analysis, the type of misconduct alleged against the directors should not matter. What matters is that if a shareholder has sought to circumvent the board's authority to institute and control litigation, the corporation should have the ability to argue, by motion to dismiss, that the shareholder's suit is procedurally improper. Thus, it should not be automatically assumed that just because a shareholder is seeking to have the company sue its officers or directors, the company and the individuals need separate counsel from the outset.

The court in Voss recognized this reality. The case involves a company that in prior litigation was found to have engaged in willful patent infringement and was ordered to pay more than $1 billion in damages. The plaintiff shareholders alleged that the company's directors and officers had engaged in fraud and had breached their fiduciary duties by permitting the company to engage in the infringement and failing to disclose it in periodic reports. The company and the individual defendants, represented by a single law firm, moved to dismiss the complaint, with the individuals arguing that the plaintiffs had failed to state a cause of action and the company arguing that demand futility had not been sufficiently alleged. Although the plaintiffs did not seek to disqualify defense counsel, they argued that the company's argument in favor of dismissal should not be considered by the court because it was being advanced by conflicted counsel.

The court dismissed the complaint with leave to amend and specifically addressed plaintiffs' argument concerning the role of defense counsel. After reviewing the case law, the court concluded that "at this stage of the litigation ... any potential conflict which may exist has no bearing on the Court's conclusion that, as a matter of law, the Plaintiffs' claims must be dismissed." The court also observed that if the case proceeded beyond the motion to dismiss, the company "would be advised to obtain independent counsel in the future."7

The Voss decision provides support to defendant companies and individuals who conclude, after careful consideration, that joint representation at the outset of derivative litigation is consistent with their respective interests. Counsel embarking on such joint representation must, of course, proceed in a manner consistent with applicable rules of professional conduct.


1.2015 U.S. Dist. LEXIS 8795 (N.D. Cal., Jan. 16, 2015).

2.In re Oracle Sec. Litig., 829 F. Supp. 1176, 1188 (N.D. Cal. 1993).

3.Forrest v. Baeza, 58 Cal. App. 4th 65 (1997).

4.Id., 58 Cal.App. 4th at 76.

5.Scattered Cos. v. Chi. Stock Exch., Inc., 1997 WL 187316, at *6-8 & n. 4 (Del. Ch. Apr. 7, 1997), aff'd on other grounds, 701 A.2d 70 (Del. 1997), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (citing cases); Respler v. Evans, 17 F.Supp. 3d 418, 421 (D. Del. 2014).

6.A California case approving joint representation in a different context, Jacuzzi v. Jacuzzi Bros., Inc. 243 Cal. App. 2d 1, 36 (1966), was disapproved in Oracle (note 2 supra) and Forrest (note 3 supra).

7.Voss, supra note 1, at *38.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

William S. Freeman
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.