biz org class 8

derivative litigation - procedural prereq's
bond and demand
is demand required or excused
grimes/DE, marx/NYS
if demand is required, board will prob refuse demand.
plaintiff may try to argue wrongful refusal.
if demand
business judgment rule

hypo. problem #5
supposed a plaint in deriv seeks embez funds and alleges with
particularly the facts of embez and partic of company.
under grimes, is demand req or excused? should it be?
n.b. -- it's a difficult plead for the plaintiff, but we should assume
that the plaintiff has satisfied particularity

courts have said that if you're talking about less than a majority
of the board (and under grimes there's 3 factors)

the challenged transaction is the board's failure to go after
the party guilty of the embezzlement, and that is the issue to which
we apply the test under grimes.

this question is supposed to test both the rule and the policy, because
the business judgment rule allows the company some protection from
frivolous litigation when the derivative litigation allows shareholders
to bring suit even when they're not representative of the class. the
question could go either way depending on the facts presented.

what if the embezzler used the embezzled funds for another company
which the majority of the board has invested (thereby the maj of the
board has a material financial interest in the new company) then demand
would be excused

if the majority of the board is interested and demand is excused, the
corporation itself still has a way out because the corp could appoint
a special litigation committee

auerbach/NY; zapata  oracle/DE

SLC can take over the derivative litigation, can terminate, or can
settle the litigation.

inside directors. work for the board and as officers and make day
to day decisions.
outside directors probably work for other companies. can be
dependent or independent.

particular director has no relation with company except seat on the board.
that is an independent director.

disinterested directors.

plaintiff must also establish the complaint and cause of action with
particularity. simply saying that compensation is excessive isn't
enough - you must also look at similarly situated executives, etc
to establish particularity

analysis.
how do you suppose this case would have been decided in DE
under grimes? the result would be the same even tho the rules
look different and the facts aren't parallel
NYS and DE don't have universal demand. would this make it
difficult to litigate specific cases? irreparable injury still must
be litigated

question 4.
in marx (NYS rule) the ct determined demand should be excused
but plaintiff failed to raise COA. accordingly, plaintiff's complaint
was dismissed on the merits. what if the court had determined
demand was required but the complaint stated a COA?

demand would be excused because marx (NYS rule)

* the question would be "to whom has the harm occured?"

plaintiff who can hold the corp hostage hasn't been chosen as
an elective. either the board or a committee of the board should
be making those decisions.

see auerbach. the court presumed that demand was excused.
but there's a SLC that is composed of members after the
challenged transaction. the committee decided that suit wasn't
in the best interest of the corp. and the SLC gets to determine
those issues and the court will defer.

analysis question p.243
presumably the parties conclude the demand was excused. is this
correct?
did the case deserve the protection of the business judgment rule?

SLC is appointed when demand is excused, but it's not clear
whether marx applies in auerbach.

what is the court looking to to defer?
- independence
- appointment

how do you suppose the new SLC was appointed?
- CEO identifies and the board approves, non-independent
persons who are involved in the case!

DE v. NYS -- the DE court makes its own independent
inquiry after the SLC to decide what's in the best interest
of the corporation

the whole board is bad so the structural bias problem is excessive
but the court decides that it will make its own independent inquiry

shareholder makes demand in DE and the board refuses the shareholders'
demand. in DE once the shareholder has made demand in DE, s/he has
conceded that demand was required. the shareholder can elect a committee

oracle case.
the business decision about the case is that the board members were
accused of insider trading and the other directors were accused of
not monitoring.

see zapata -- 2nd step is the court's in