One of U.S. corporate law's most salient features is its flexibility. Those who control and manage the corporation are given a long leash. This is particularly evident when the United States is compared with other countries in studies like the World Bank's annual Doing Business project. According to the detailed study that developed the World Bank methodology for measuring investor protection,1 the United States scored a 0.33 for "ex ante private control of self-dealing." This was not only below the world average of 0.36, but also well below the 0.58 average for common law countries. The United Kingdom, in contrast, received a perfect score of 1.0.2
That the country with the world's largest and deepest capital markets has, in some respects, among the world's looser corporate laws may seem counterintuitive. It works because of the strength of two underlying institutions. One is our disclosure system, which assures investors that they see the full picture. The other is the fiduciary concept, which replaces standardized prohibitions with the opportunity to evaluate managerial conduct on a more holistic basis. Applied soundly, the fiduciary concept filters opportunistic behavior by those in control of a corporation without deterring good faith efforts to further shareholder welfare in ways that might run afoul of a more technical set of restrictions.
The critical issue, therefore, is who performs the fiduciary evaluation. Traditionally, courts have exercised principal responsibility through shareholder derivative suits. However, over the last three decades, this task has shifted to others, chiefly the independent members of a corporation's board of directors. Shareholders continue to file derivative suits, but they no longer play a central role in the evaluation. Law reviews' attention to the topic likewise has declined. Current scholarship tends to focus on either recent cases in local jurisdictions or comparative law work. Ironically, although we rely on the derivative suit less and less in this country, we are eager to see whether other countries embrace it. To invert a familiar bit of nostalgia, the derivative suit seems to be "forgotten, but not gone."
This Article examines the factors contributing to the decline of the derivative suit and evaluates whether corporations and their shareholders are better off as a result. To assess the state of derivative litigation today, it surveys opinions involving derivative suits involving Delaware corporations brought in federal and Delaware courts. In all, 294 cases are considered. This examination suggests that the "forgotten" derivative suit is largely the result of preoccupation with issues facing highly visible, large cap corporations, where a number of alternatives and substitutes have developed to supply most (but not all) of the benefits traditionally associated with derivative litigation. Derivative suits continue to play an essential role, however, in other sectors of the corporate law landscape, particularly for transactions involving controlling persons. Courts have been more creative recently in finding ways to preserve the minority shareholder's access to court in these sectors, without displacing the framework developed to restrict the typical large cap derivative suit.
The Article is organized as follows: Part II traces the history of how, beginning in the late 1970s, courts shifted their responsibility for overseeing fiduciary conduct to independent directors by taking a more restrictive approach to derivative suits in general and to the role of pre-suit demand in particular. Part III analyzes the reasons for this shift and considers whether subsequent developments have born them out. Part IV reports the results of a survey of judicial opinions. Emerging from that survey is a three-category typology of derivative suits, suggesting the need to look beyond the conventional closely held/publicly held dichotomy. While one category ("Closely Held") is confined to close corporations and other closely held firms, the other two involve publicly traded corporations, with derivative suits playing a very different role in each. …