Corporate Governance in the Courtroom: An Empirical Analysis
Erickson, Jessica, William and Mary Law Review
Conventional wisdom is that shareholder derivative suits are dead. Yet this death knell is decidedly premature. The current conception of shareholder derivative suits is based on an empirical record limited to suits filed in Delaware or on behalf of Delaware corporations, leaving suits outside this sphere in the shadows of corporate law scholarship. This Article aims to fill this gap by presenting the first empirical examination of shareholder derivative suits in the federal courts. Using an original, hand-collected data set, my study reveals that shareholder derivative suits are far from dead. Shareholders file more shareholder derivative suits than securities class actions, the area of corporate litigation that has received nearly all of the scholarly attention. By writing off shareholder derivative suits, scholars have missed the distinct role that these suits play in corporate law, particularly in the area of corporate governance. Unlike traditional litigation, remarkably few of the suits in my study ended with monetary payments. Instead, these suits more commonly ended with corporations agreeing to reform their own corporate governance practices, from the number of independent directors on their boards to the method by which they compensate their top executives. These settlements reflect the rise of a new type of shareholder activism, one that has gone undocumented in the legal literature. Corporate governance has moved into the courtroom, and this development has important, and potentially troubling, implications for corporate law.
TABLE OF CONTENTS INTRODUCTION I. STUDY DESIGN AND METHODOLOGY II. EMPIRICAL ANALYSIS OF FEDERAL DERIVATIVE SUITS A. The Unseen Importance of Derivative Suits B. Surveying the Complaints 1. Mapping the Complaints 2. Detailing the Parties a. Derivative Plaintiffs b. Plaintiff Corporations c. Defendants 3. Analyzing the Allegations C. Procedural Hurdles in Derivative Suits 1. Demand in the Federal Courts 2. Special Litigation Committees D. Four Paths to Resolution 1. Judgment 2. Involuntary Dismissals 3. Voluntary Dismissals 4. Settlements a. Private Company Settlements b. Public Company Settlements III. ASSESSING CORPORATE GOVERNANCE IN THE COURTROOM A. The Promise of Redress B. The Limits of Reform C. The Possibility of Deterrence CONCLUSION
Conventional wisdom is that shareholder derivative suits play a small, and dwindling, role in corporate law. Once the cornerstone of corporate law, (1) these suits are now viewed as relics of an older time, rendered obsolete by more modern means of policing corporate misconduct such as high-stakes securities class actions, sweeping government investigations, and the stringent listing standards of the national stock exchanges. As the tools for monitoring corporate managers multiply, scholars have all but abandoned shareholder derivative suits. In the world of corporate law scholarship, shareholder derivative suits are not just "forgotten," (2) they are "dead." (3)
As a result, few scholars have deemed these suits worthy of empirical analysis. Over the last fifteen years, there have been just two studies of shareholder derivative suits. (4) Although both made crucial contributions to our understanding of these suits, the empirical focus in these studies was on suits filed in Delaware state court or on behalf of Delaware corporations. (5) There remains no comprehensive examination of shareholder derivative suits in the federal courts, where most corporate litigation is centered.
This dearth of empirical data comes at a particularly bad time. As the financial markets have experienced tremendous upheaval, corporate law has been besieged with calls for reform. (6) Scholars and politicians alike have called for a restructuring of market regulations and renewed oversight of private litigation. …