Shareholder Litigation Under Indeterminate Corporate Law

Abstract

One of the least explained phenomena in American corporate law is the puzzling circularity of director and officer liability insurance and indemnification. Under the auspices of state corporate law, virtually all public corporations use internal and external insurance to protect their boards and management from liability for breach of fiduciary duties. The concept of liability insurance and indemnification in relation to shareholder fiduciary claims seems on its face futile. Arguably, there is no utility for shareholders in suing corporate fiduciaries for damages when fiduciaries pay most of these damages using funds provided by shareholders. The resulting transaction and litigation costs simply seem superfluous. This Article argues that insurance and indemnification can be a socially desirable mechanism that induces plaintiffs to sue yet keeps sanctions low. Although litigation is costly, and should ordinarily be kept at a minimum, shareholder litigation can be cost-effective in view of the indeterminacy that characterizes corporate law.