US Corporate Law: Part VI (Derivative suits + Minority shareholder protections)

Derivative suits.

Because directors owe their duties to the corporation and not, as a general rule, to specific shareholders or stakeholders, the right to sue for breaches of directors’ duty rests by default with the corporation itself. The corporation is necessarily a party to the suit. This creates a difficulty because almost always, the right to litigate falls under the general powers of directors to manage the corporation day to day (for example, Delaware General Corporation Law §141(a)). Often, cases arise (such as in Broz v Cellular Information Systems Inc) where an action is brought against a director because the corporation has been taken over and a new, non-friendly board is in place, or because the board has been replaced after bankruptcy. Otherwise, there is a possibility of a conflict of interest because directors will be reluctant to sue their colleagues, particularly when they develop personal ties. The law has sought to define further cases where groups other than directors can sue for breaches of duty. First, many jurisdictions outside the US allow a specific percentage of shareholders to bring a claim as of right (for example, 1 percent). This solution may still entail significant collective action problems where shareholders are dispersed, like the US. Second, some jurisdictions give standing to sue to non-shareholder groups, particularly creditors, whose collective action problems are less. Otherwise, third, the main alternative is that any individual shareholder may "derive" a claim on the corporation's behalf to sue for breach of duty, but such a derivative suit will be subject to permission from the court.

Minority shareholder protections.

Ivanhoe Partners v Newmont Mining Corp. (1987) a shareholder owning over 50% of shares is a controlling shareholder; but actual control may also be present through other mechanisms.

Citron v Fairchild Camera & Instrument Corp. (1989) non-controlling shareholders do not owe duties to minority shareholders and may vote their shares for personal gain without concern.

In re Cysive Inc Shareholders Litigation (2003) Nelson Carbonell owned 35% of Cysive, Inc., a publicly traded company. His associates' holdings and options to buy more stock, however, actually meant he controlled around 40% of the votes. Chancellor held that "without having to attract much, if any, support from public stockholders" Carbonell could control the company. This was especially so since "100% turn-out is unlikely even in a contested election" and "40% block is very potent in view of that reality."