Juggling Shareholder Rights and Strike Suits in Derivative Litigation: The ALI Drops the Ball
Carol B. Swanson
Hamline University - School of Law
January 1, 1993
Minnesota Law Review, Vol. 77, p. 1339, 1993
Beginning with an analytical overview of the purposes and development of shareholder derivative suits, pre-suit demand, and judicial review, this article plunges into the very complex ALI proposals. It evaluates the principal ALI derivative suit provisions in light of the Corporate Governance Project’s stated purposes, including the Reporter’s supporting analyses and the resulting recommendations. Since ALI principles serve as nonbinding recommendations for state legislatures and for courts applying state corporation law, the question now is the extent to which today’s courts and legislatures will – and indeed should – follow the ALI’s suggestions. Ultimately, this article contends that the ALI’s massive undertaking represents an opportunity lost. Although wisely advocating universal demand, the ALI’s proposed standards for substantive review of management’s recommendations are unworkable and too deferential to corporations. Given the dissatisfaction with the ALI approach, then, the article concludes by exploring what standards might guide the balance between the rights of shareholders and boards of directors. Joining the strong modern trend of endorsing universal demand, the article then proposes a simplified hybrid standard of judicial review. Like the Corporate Governance Project, the suggested approach attempts to balance the dangers of strike suits with the undeniable need for ensuring meaningful shareholder access to the courts. Unlike the ALI’s final proposal, however, this article advocates a unitary standard that promotes the important values of clarity and flexibility, thus permitting shareholders key access to the courts while providing the necessary deference to the recommendations of corporate management.
Number of Pages in PDF File: 54
Keywords: Shareholder, derivative litigation, ALI, futility exception, deferential business judgment, derivation, burdens of proof, Corporate Governance Project of the American Law Institute, strike, corporate management
Date posted: March 2, 2013
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