A Necessary Gatekeeper: The Fiduciary Duties of the Lead Plaintiff in Shareholder Derivative Litigation

Article excerpt

  I. INTRODUCTION
 II. BACKGROUND
     A. The Historical Development of the Shareholder Derivative
        Action
     B. Representative Litigation
     C. Comparing Shareholder Derivative Actions and Class Actions
        1. Shareholder Derivative Actions
           a. Direct Versus Derivative
           b. The Demand Requirement
        2. Class Actions
     D. Fiduciary Duties Generally
     E. Lead Plaintiff Fiduciary Duties in the Context of Class Action
        Litigation
     F. The Private Securities Litigation Reform Act of 1995
     G. Litigation Costs
III. ANALYSIS
     A. Current Gatekeeping Functions Do Not Prevent Plaintiffs from
        Filing Detrimental Shareholder Derivative Actions
        1. Special Litigation Committees, Demand Requirements, and
           High Pleading Standards are Inadequate Gatekeepers
           Because of Timing
        2. The Lead Plaintiff is in a Better Position than the
           Plaint's Attorney to Police the Course of the Litigation
           a. Problems with Relying on Plaintiffs' Attorneys to
              Police Derivative Litigation
     B. Institutional Investors Provide a Source of Lead Plaintiffs
        with Knowledge of the System and the Likelihood of a Claim's
        Success
     C. Why Settle a Worthless Suit?
     D. Bringing a Worthless Suit Breaches a Lead Plaint's Fiduciary
        Duties to the Corporation and Other Shareholders by Wasting
        Corporate Assets
 IV. RECOMMENDATION
     A. State Legislatures Should Enact a Statutory Framework
        Addressing Lead Plaintiff Fiduciary Duties
        1. Require a Plaintiff Filing a Derivative Action to
           Provide Notice to Shareholders Who May Then Move to
           Serve as Lead Plaintiff
        2. Allow the Court-Appointed Lead Plaintiff to Dismiss the
           Case
        3. Introduce Incentives for Institutional Investors to
           Serve as Lead Plaintiffs
           a. The Statutory Scheme Should Fully Compensate Lead
              Plaints for Their Time and Efforts
           b. The Statutory Scheme Should Award Bonuses Based on
              Who Pays the Settlement and for Significant
              Governance Reforms
              i. The Statutory Scheme Should Allow Courts to
                 Award a Bonus When the Actual Defendants
                 Contribute to the Settlement
             ii. The Statutory Scheme Should Allow Courts to
                 Award a Bonus for Significant Governance
                 Reforms
            iii. Incentives Independent of the Proposed
                 Statutory Scheme
        4. Clearly Impose Fiduciary Duties on Shareholder
           Derivative Action Lead Plaintiffs
           a. Borrow from Current Statutory Fiduciary Duty
              Frameworks
           b. Borrow from Case Law Defining Fiduciary Duties
           c. Leave Room for Court Discretion
        5. Sanction Lead Plaints Who Violate Their Fiduciary
           Duties
  V. CONCLUSION

I. INTRODUCTION

Fraudulent behavior by corporate directors is not a new problem (1) and neither is the derivative action--the tool often used to address this problem. (2) In 1957, one commentator noted that "[i]n 1832 it must have appeared, as it does today, that the individual stockholder was in need of a means of invoking judicial power to curb managerial abuse." (3) This statement is just as true in 2009, as is apparent from the managerial and director abuses that continue to plague corporations.

Although the shareholder derivative action provides a useful tool to address the important problem of director misconduct, the action has faults that can prevent it from accomplishing this goal. Shareholder derivative litigation is representative litigation, meaning that the person who brings the suit represents others' interests. (4) A major weakness of representative litigation in general is that the agent controlling the litigation often does not have the same interests as the principal. …