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Here are my personal notes/briefs on the relevant cases. Check it out:

1. Eisenberg v. Flying Tiger Line, Inc.

a. Originally, there was no action that could be brought against faithless directors: ones that were not acting in the best interest of the corporation

b. Mechanism of the Shareholder Derivative case, where the SH steps into the shoes of the corporation and brings suit in the name of the corporation. This makes these suits more tenable as a matter of economic interest, largely because it gives rise to the possibility of class actions, and gives attorneys an incentive to bring these cases.

c. Objective served: enhances directorial accountability vindicating duties owed by directors to SHs to the extent that the mechanism facilitates suits for breach of fiduciary duty

d. Efficiency: centralizing challenges to such duties to the extent that a SH steps into the shoes of a corporation

e. Without derivative suits, one would face the prospects of SHs lining up and bringing individual suits

f. Per share basis, the stakes involved in these cases would diminish the likelihood that the suits would be brought in the first place.

g. But, there is a concern that the mechanism will facilitate “strike suits”-suits merely brought to secure settlements for P attorneys via “go away” money.

h. Here, you have FT, a freight corporation. Through reorganization it forms a wholly owned subsidiary, FTC, which organizes another subsidiary, FTL by way of assets, and the FT SH is left holding shares of FTC (a holding company)

i. Eisenberg claims that his power as a SH has been diluted by the reorganization

j. Why might a SH prefer to be a shareholder in the business and not the holding company?

i. Now that FTC is the sole shareholder of FTL, the SH of FTC has only an indirect say exercised through the holding company, meaning that the SH will lose his say in business operations, losing control over the business themselves.

k. How do we distinguish between the derivative claim or a direct claim

i. The reorganization is all paper, there is no injury to the business itself. E is making a claim with respect to HIS position within the corporation. It is an injury to him individually as a SH.

ii. This is about power within the corporation, and it is brought as a derivative claim, not a direct claim.

l. Why does this make a difference whether a claim is direct or derivative

i. The issue litigated: the extent that it was a derivative claim, he would have to post a bond and might have to pay legal fees if the claim was not sustained.

ii. Demand requirement that attaches to derivative cases: before being able to pursue the claim in the name of the corporation, the SH must make a demand of the board to bring a claim in the name of the corporation

iii. Important to know to whom the remedy would be extended to

iv. If the remedy is directed to the corp.-derivative; SH individually-direct

v. Derivative: Corporate purpose cases-Wrigley, Duty of Care: Caremark, Eisner, Camen; Duty of Loyalty: Bayer, Fliegler; Proxy expense: Levin, Rosenfeld

vi. Direct Cases: Involving Voting Rights: Stroh, SH proposal cases, Inspection Rights cases-cases about the SHs place within the corporation

vii. Merger-tend to be derivative in nature, alleging that defensive tactics harm the corporation

1. The exception is Unocal-Mesa claimed that it was treated worse than other SHs

viii. Closed corporation: doesn’t matter whether it was derivative or not

1. Ex. Looting case in a two person corporation-The looting presents a harm to the corporation, but in this case the harm to the corporation is also a harm to the other SH in the same magnitude

ix. If I own 100 shares of Disney and there is millions in corporate waste, I can’t recover the millions by myself-this is why in derivative actions, the recovery goes to the corporation

x. Case on 240-weird case where there is a personal recovery in a derivative action-not the norm

xi. Alaska Plastics-court sustains as a direct claim unequal treatment vis a vie other SHs

xii. SH actions are either direct or derivative, which makes it important to understand which is which

xiii. Relates to the requirement of demand on the directors.

1. Demand which before a SH can pursue a derivative action, the SH has to go to the board and demand that the corporation bring the action

2. Directors undertake the suit on behalf of the corporation

m. Why not allow SHs to go into court whenever they see a harm to the corporation whenever they see a harm to the corporation

i. Rationale: harms posed by allowing SHs on an unconstrained basis to bring claims against the corporation

ii. Immediate costs of defending against the action

iii. Social cost: flood the courts and meritous claims might not be heard in a timely manner

iv. Bad publicity

v. Sometimes, it is not in the best interest of the corporation to have a suit go forward-demand requirement brings a problem to the attention to the directors on the assumption that the directors will act in the corporation’s best interest to decide whether the complaint merits a claim

n. Demand requirement brings the problem to the attention of the directors

o. When are we concerned about the directors not acting in the corporation’s best interest

i. When they have a self interest-then we get back to basic principles of duty of loyalty

ii. Issues when the claim involves some interest on the part of the directors, especially when the claim seeks damages against directors

p. Black Letter Law: A cause of action that is determined to be personal, rather than derivative, cannot be dismissed because the plaintiff fails to post security for the corporation’s costs.

2. Grimes v. Donald

a. Challenges an employment agreement between the corporation and Founder/CEO where the CEO is entitled to declare constructive termination without cause where there is unreasonable interference by the board or substantial SH in the company in carrying out the CEO’s good faith duties.

b. The problem

i. Potentially restrain the company from terminating him

ii. Constraining the board from engaging in their fiduciary duties, because it may be in the corporate interest from firing him or interfering in his function as a CEO-restraining the board from the oversight of the corporation

iii. Imposing a penalty of the board’s exercise of independent judgment

c. What does the court do with the substantive claim, which is addressed as a direct claim?

i. This is not an unusual type of constraint, but the court said that this is an unusual way of articulating obligations in an employment agreement

ii. Case points to the fact that the founders of the corporation want to retain control

d. Google case: considering two classes of shares; voting and non-voting. The investment bankers are concerned because lack of voting shares gets priced into the shares (a substantial discount). The founders of Google are also concerning I-bankers with their wacky project ideas

e. The court here finds that the abdication claim, the claim that the directors abdicated their responsibility as directors in entering into this agreement – properly styled as a direct claim

f. Court allows the claim to go to the merits, but rejects the merits

g. Claims for damages were derivative-owed to the corporation, not to the SHs bringing the suit

h. We start with a presumption that demand is required, except where it would be futile to do so

i. Purposes of the Demand requirement-bottom 246

i. Require demand of the board unless it is futile to do so

ii. Futility Doctrine: basis for claiming excusal from demand requirement

1. Majority of the board has a monetary, family, or material interest, etc.-see 246

j. In this case, the SH did make the demand

i. Once the demand has been made, you cannot claim futility

ii. If the demand is made and the board refuses to proceed with the claim, the SH may have a claim for wrongful refusal of the demand, but at that point, the board’s refusal to reject the claim is only subject to review under the BJR

iii. You get an extreme deference to the board

iv. Duty of care: check it out and go through the motions and make sure you have all of the material information in front of you to show that you made an attempt to hear the demand out

1. This will insulate a decision of the board from review

k. If you make a demand, you are waiving any futility argument, and if they refuse the claim, they will be subject to the BJR

i. You want to tell P not to make a demand

ii. By making a demand, you are conceding a conflict of interest claim

l. If the court considers the failure to make a claim under the BJR, the court will never get to the merits of your claim.

i. The litigation then becomes why the claim was not made, not the claim itself

ii. As a litigating strategy, you do not want to make a demand, because you are in business judgment land

iii. A lot of litigation over whether the demand is required

iv. If SH 1 makes a demand, is refused, and the claim is thrown out, all other SHs are estopped from bringing the claim

m. Black Letter Law: If a shareholder demands that the board of directors take action and that demand is entitled to the presumption that the rejection was made in good faith unless the stockholder can allege sufficient facts to overcome the presumption.

3. Marx v. Akers

a. Claim by SH-related to allegations of corporate waste by board of directors in awarding excessive compensation to IBM execs and outsiders directors

b. NY approach to the demand: have to show with particularity by way of alleged facts that the demand would be futile

c. If demand would be futile, the court will proceed to the merits of the claim

d. Delaware approach is different-251

e. Duty of loyalty inquiry-does the board suffer a conflict of interest

i. 3 directors are also executives

1. Those 3 do not constitute the majority of the board

2. Demand was required here

3. With respect of outside directors, there is a conflict of interest, because they get compensation, so the demand would be futile

f. Court gets to the merits and rejects the claim

i. With respect to the outside directors, they are all buddies-so they will do what is best for the others

g. Black Letter Law: Demands on boards of directors are futile if a complaint alleges with particularity that: (1) a majority of the directors are interested in the transaction; (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction; (3) the directors failed to exercise their business judgment in approving the transaction.

4. The Rule of Special Committees

a. Many SH claims will involve conduct on behalf of the B of D

5. Auerbach v. Bennett

a. Bribes paid to foreign officials-majority of the board was implicated

b. Demand would be futile, because the majority of the board suffered a conflict of interest

c. Tactic adopted by D boards is to appoint committees of the board of disinterested directors

d. The board here adopted a resolution developing a committee after the bribes were undertaken with 3 non-interested directors

e. To this special committee, the board delegated all of its powers concerning the derivative claim

f. Special litigation committee comes back and decides the claim should not be pursued-none of the directors were benefited directly, and the claim would be a waste of resources

g. This is a creative way to in effect resuscitate the board’s authority and the demand requirement

h. What does the P argue about that? Why are we going to be suspicious by a decision of the special litigation committee not to pursue the claim

i. The rest of the board appointed the litigation committee, including the interested directors, after the alleged incident, so they will appoint people who will decide not to pursue a claim against them

ii. Court rejects this argument against the disinterestedness of the special committee, and finds the board to have the power to delegate the power to a committee of the board

i. Proceeds to examine the decision of the special committee not to pursue the action

i. Here we have the court finding the substantive decision falls within the grace of BJR

ii. We will defer to even a stupid decision on behalf of the board

j. With respect to the process, here we have the court imposing the requirement that the board chose their investigative requirements in good faith, and the areas examined are examined completely and in good faith. This is BJR

k. Not looking at the merits of the claim, but looking at the decision of the board gets us to the BJR

l. This mechanism is a way for the board to resurrect the demand requirement where otherwise the demand would be found futile, enhancing the chance that questionable conduct by the board will be insulated

m. Black Letter Law: A court may properly inquire as to the adequacy and appropriateness of a special litigation committee’s investigative procedures and methodologies, but may not consider factors under the domain of business judgment.

6. Zapata Corp. v. Maldonado

a. SH claim filed derivatively listing all of the directors as defendants. No demand was made, because P argues it was futile.

i. You can’t establish futility just by listing all of the board members as Ds

b. After the suit was filed, a special litigation committee was created

c. The question is whether once you have a case in court filed by the SH, whether the decision of a special litigation committee can cause the suit to be dismissed.

i. The court here finds that a special litigation committee may have the power to cause dismissal of a suit already filed

d. The Delaware court here applies a more stringent standard of review to the decision of the special committee not to pursue the action

e. Even when we talk about disinterested directors in a special committee, they are passing judgment on fellow directors for whom they might have empathy

f. Court put the burden of proof on the committee to demonstrate independence, good faith, and reasonable investigation.

i. With respect to the process used to decide not to seek the claim, the burden is on the board

ii. Otherwise, the test stays the same

g. With respect to the substance of the claim, the court purports to apply its own independent business judgment with respect to whether a claim should be pursued by the corp.

i. There is a little more evidence that there should not be deference to the special committee

ii. Maybe we should not defer under standard BJR to those decisions, at least where we are talking about a derivative suit that already has been filed

h. This heightened standard only applies to demand excused cases

i. Not extended to cases where demand has been required

i. Black Letter Law: When assessing a special litigation committee’s motion to dismiss a derivative action, a court must: (1)determine whether the committee acted independently, in good faith, and made a reasonable investigation, and; (2) apply the court’s own independent business judgment.