Derivative claims are claims brought on behalf of the company, for harm caused to the company, and any damages awarded go to the company (as opposed to a class action in which the class is the recipient of any recovery). Derivative suits must overcome two key procedural hurdles. First, the plaintiff must be a shareholder continuously from the time of the alleged conduct until the end of the lawsuit, and if the plaintiff sells his or her shares prior to trial, he or she no longer has standing. Second, the plaintiff must show that his or her demand on the board to take corrective action would be futile. According to the panel, this hurdle is extremely difficult to show in most cases, and requires the plaintiff to show either that the majority of the board is conflicted or that the board is dominated by one member who is conflicted.
Another difficulty posed by derivative litigations is the inability to conduct discovery prior to surpassing the demand futility hurdle. The panelists suggested that statutes, such as Delaware §220 can be useful tools to allow the plaintiff to serve targeted discovery (books and records) to obtain enough documents to survive a motion to dismiss. According to one panelist, although this has become a popular method of obtaining discovery, the plaintiff must demonstrate that he or she has a proper purpose for obtaining such discovery.
The panel also addressed special litigation committees (“SLC”), which a corporation can appoint at any time to investigate allegations brought and recommend how the corporation should respond to suits. If called upon, the SLC must persuade a judge that: (1) the members are independent; (2) they acted in good faith; and (3) that they had good reasons for their determination. The panelists explained that the Oracle case recently showed that showing independence of the members is not necessarily a slam-dunk.
Furthermore, the panelists suggested that the deference once given to SLCs has been somewhat reduced by recent decisions which called into question whether the SLC’s original recommendations to the company as to whether it was in the company’s best interests to pursue the claims alleged were, in fact, independent or in good faith.
The panel did note that the protections afforded by the business judgment rule and good faith defenses are alive and well, as shown by the recent Citigroup and Dow Chemical cases.
In closing, the panel suggested that the old days of wrapping derivative claims into class action settlements is over because derivative claims have taken on a life of their own. They suggested that more and more derivative claims would be filed in the coming year.