The board's position
A derivative claim belongs to the corporation, so the board starts with an important role in deciding what happens to it. When a shareholder makes a demand, the board can investigate and decide whether pursuing the claim is in the company's interest, and courts in New York and Delaware generally give weight to a good-faith, informed decision by disinterested directors. If directors who are accused of wrongdoing make that decision, the deference is weaker. Some boards form a special committee of independent directors to evaluate the claims, and that committee's independence and process are examined closely if it later asks the court to end the case. Directors should not assume the company's regular counsel can represent everyone, because the interests of the company, the board, and individual officers can diverge.
Insurance, fees, and records
Notify directors and officers liability insurers as soon as a demand or complaint arrives. Review the company's charter, bylaws, and indemnification agreements to see what rights directors and officers have to advancement of legal fees and to indemnification. Preserve board materials, minutes, and communications related to the challenged decisions, and keep in mind that a shareholder may first seek them through a books and records request. Derivative suits often travel with securities class actions or regulatory inquiries arising from the same events, so the documents and positions in each should be coordinated. Statements made in one proceeding can be used in the others.
How these matters tend to resolve
Many derivative actions are resolved by motion, often on the question of whether the shareholder made a proper demand or adequately showed that demand was excused. Others settle, frequently with governance changes such as new board committees, revised policies, or added oversight, and sometimes with a payment funded largely by insurance. Settlements require court approval and notice to shareholders, and the plaintiff's attorney's fees are reviewed by the court. We help boards and committees decide how to respond to a demand, represent companies and directors in derivative litigation, and work with insurers on coverage and settlement.
