Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, November 25, 2007

Davis on Derivative Suits

The Forgotten Derivative Suit, by KENNETH B. DAVIS Jr.. University of Wisconsin Law School, was recently posted on SSRN.  Here is the abstract:

Policing fiduciary misconduct by corporate officers and directors has traditionally been the province of the courts, by means of the shareholders derivative suit. Beginning in the late 1970s, courts ceded much of this authority to the corporation's independent directors, substantially restricting the shareholders ability to bring suit. After tracing the history and reasons for this restrictive approach, this article examines its consequences, twenty-five years later. To do so, it employs a variety of perspectives, including the production of precedent, the disclosure the related-party transactions, and most significantly, a review of the 294 reported derivative suits decided in the federal and Delaware courts from 2000 through the first quarter of 2007. The results reveal that the role played by derivative litigation today varies widely with the kind of corporation and misconduct involved. For the types of misconduct typical of large cap, widely held corporations, other institutions now perform much of the deterrent function historically associated with derivative suits. As a result, the fact that few of these suits survive a motion to dismiss is often consistent with the shareholders' best interests, given the cost of litigation. For smaller firms with controlling shareholders, on the other hand, derivative suits continue to perform a unique function. Courts have therefore needed to be creative in providing minority shareholders the means to relief, notwithstanding the dictates of the restrictive approach.

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