A Better Approach for Balancing Authority and Accountability in Shareholder Derivative Litigation

Abstract:     
Corporations present an interesting illustration of the authority versus accountability dilemma. Shareholders elect the directors of the corporation and the law vests those directors with almost unlimited authority to manage the corporation. Yet, shareholders have few effective means for holding directors accountable for their decisions other than through shareholder derivative litigation. In such litigation, the business judgment rule serves as the mechanism by which courts attempt to balance directors' authority to make decisions for the corporation against shareholders' right to hold directors accountable for those decisions.

As this Article discusses, numerous theories exist as to the proper formulation of the business judgment rule. At the core, such theories reflect differing perspectives on the proper balancing of authority and accountability in corporations. A broad and diverse literature examines the authority versus accountability dilemmas presented in other areas of law, yet corporate scholars have not examined the insights this literature offers for corporate law. This Article fills that void by examining this literature and applying it to the corporate context. It then analyzes the current balancing of authority and accountability in shareholder derivative litigation as well as scholars' proposals to shift that balance. After rejecting such proposals, the Article concludes by proffering a better approach for resolving the authority versus accountability dilemma in shareholder derivative litigation.

Number of Pages in PDF File: 54

Accepted Paper Series