The Demand Review Committee: How it Works, and How it Could Work Better

14 Pages Posted: 5 May 2018

See all articles by Collins Seitz

Collins Seitz

Government of the State of Delaware - Supreme Court of Delaware

S. Michael Sirkin

Ross Aronstam & Moritz LLP

Date Written: April 17, 2018

Abstract

Stockholders must ordinarily make a demand on their board of directors before initiating litigation on the corporation’s behalf. But the litigation consequences of a stockholder demand—a binding concession of the board’s ability to impartially consider a demand—are so harsh in the ensuing litigation that stockholders rarely choose that path. The demand requirement is thus falling short of its promise as an internal dispute resolution mechanism. If, as we suggest, stockholders typically avoid making a demand and instead prefer to initiate litigation and raise demand futility arguments, no matter how weak, they deprive independent boards of the opportunity to consider the merits of potential litigation outside the courtroom. We propose a private-ordering solution, in which stockholders and boards can agree, if they choose, to reserve rights on demand futility arguments while a demand review process is undertaken. This would allow boards to engage with stockholders in the review process, and would replace some demand futility litigation with boardroom deliberation, thereby restoring the internal dispute resolution function to the demand requirement.

Keywords: Delaware, derivative, demand requirement

Suggested Citation

Seitz, Collins and Sirkin, S. Michael, The Demand Review Committee: How it Works, and How it Could Work Better (April 17, 2018). Business Lawyer, Volume 73 (Spring 2018), Available at SSRN: https://ssrn.com/abstract=3164959

Collins Seitz

Government of the State of Delaware - Supreme Court of Delaware ( email )

820 N. French Street
P.O. Box 1997
Wilmington, DE 19801
United States

S. Michael Sirkin (Contact Author)

Ross Aronstam & Moritz LLP ( email )

100 S West Street, Suite 400
Wilmington, DE 19801
United States

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