March 26, 2012 Articles

Key 2011 Decisions in Shareholder Derivative Litigation

Courts last year generally reaffirmed well-established corporate-governance principles protecting directors and officers.

By Scott B. Schreiber, Andrew T. Karron, and Kavita Kumar Puri

In 2011, courts generally reaffirmed certain well-established corporate-governance principles that provide directors and officers with substantial protection against shareholder derivative litigation challenging their good-faith exercise of business judgment. The courts affirmed the importance of the shareholder-demand requirement in preserving the protections of the business-judgment rule, limited the ability of a shareholder to bring Caremark type claims against directors based on the alleged assumption of excessive business risk, and employed judicial restraint in reviewing special-litigation-committee decisions not to pursue shareholder derivative claims.

But the courts’ recognition of their generally limited role in reviewing corporate business judgment is neither an abandonment of their traditional oversight role nor a carte blanche to corporate directors and managers. To the contrary, derivative litigation remains an effective tool in appropriate circumstances for shareholders to vindicate the corporation’s rights where directors and officers fail to fulfill their fiduciary duties. The Delaware Chancery Court’s decision in Southern Peru Copper Corp., awarding more than $1.347 billion in a derivative case arising out of a merger, dramatically illustrates the point—as well as the critical importance to directors and officers of exculpatory provisions in corporate certificates pursuant to 8 Del. C. § 102(b)(7) and similar provisions contained in other state corporate laws.

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