Business & Corporate
The Demand Review Committee: How It Works, and How It Could Work Better
73(2): 305-318 (Spring 2018) Stockholders must ordinarily make a demand on their board of directorsbefore initiating litigation on the corporation’s behalf. But the litigationconsequences of a stockholder demand—a binding concessionof the board’s ability to impartially consider a demand—are so harshin the ensuing litigation that stockholders rarely choose that path. Thedemand requirement is thus falling short of its promise as an internaldispute resolution mechanism. If, as we suggest, stockholders typicallyavoid making a demand and instead prefer to initiate litigation and raisedemand futility arguments, no matter how weak, they deprive independentboards of the opportunity to consider the merits of potential litigationoutside the courtroom. We propose a private-ordering solution,in which stockholders and boards can agree, if they choose, to reserverights on demand futility arguments while a demand review process isundertaken. This would allow boards to engage with stockholders in thereview process, and would replace some demand futility litigation withboardroom deliberation, thereby restoring the internal dispute resolutionfunction to the demand requirement.