Comment by Andrew J. Sockol
The collapse of Enron and the subsequent filing of nearly fifty derivative suits, coupled with the financial scrutiny of many other large companies, has thrust the shareholder derivative suit into the forefront of the American corporate psyche. Shareholder derivative suits are a necessary, albeit flawed, check upon the potential self-interest, lack of care, and irresponsibility of a corporation's directors and officers. Unfortunately, the current system facilitates the means for shareholder derivative suits to be filed, not solely as a mechanism to address problems with corporate misconduct and greed, but also as a vehicle that enables lawyers to prosper at the expense of corporations and their shareholders.
The derivative action originated in early nineteenth-century English common law. The United States Supreme Court recognized the derivative suit as a valid action by 1855. The derivative mechanism allows shareholders to “enforce a right of a corporation . . . [that has] failed to enforce a right which may properly be asserted by it.” As the moniker “shareholder derivative suit” implies, there is a legal requirement that the plaintiff be a stockholder of the corporation at the time the cause of action arises. The purpose of this provision is to prevent the purchase of shares for the sole reason of filing a derivative action challenging a transaction that took place prior to the stock purchase date.
In a shareholder derivative suit, the shareholders are suing the officers or directors of a corporation on behalf of the corporation itself. A shareholder derivative suit can be beneficial to a corporation in two primary circumstances. First, when the prospect of a derivative action deters misconduct or, second, when the corporation actually derives a net gain from the resolution of the suit. However, it also has been argued that the mere filing of a derivative suit may compel a beneficial reaction by the corporation, including remedies such as board restructuring.
About the Author
Andrew J. Sockol. J.D. candidate 2003, Tulane Law School; B.S. 1995, University of Rhode Island.
Citation
77 Tul. L. Rev. 1095 (2003)