The ‘Director Preference’ in Stockholder Litigation
40 Pages Posted: 19 Jun 2017
Date Written: December 1, 2016
Stockholders are widely viewed as the owners of and residual claimants to the assets of a corporation. Management of a corporation, by contrast, is entrusted to paid managers – the board of directors and executive officers. To prevent both directors and officers from managing the corporation for their personal benefit without regard to the interests of stockholders, stockholders have the ability to sue for such behavior as a breach of fiduciary duty. But in practice, directors are the primary focus of this type of stockholder litigation while officers are largely ignored – a phenomenon this paper labels the “director preference.” Given the prominence of executive officers in the corporate management scheme, often characterized by wide-ranging authority to act and substantial deference from directors, the risks associated with officer self-interest are considerable. The director preference, however, undermines the utility of stockholder litigation as a check on officer conduct. Moreover, recent legal reforms and changes in best corporate practices highlight the significance and costs of the director preference. After examining possible explanations for the director preference, this paper concludes that self-interest on the part of plaintiffs’ attorneys – known in the literature as a litigation agency cost – seems to be driving the focus on directors, and absence of officers, as defendants in stockholder litigation.
Keywords: Officer, Corporation, Board of Directors, Stockholder Litigation, Legal Agency Costs, Director Preference, Fiduciary Duties, Shareholder Litigation, Accountability, Management, Stockholders
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