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- Title
The Demand Review Committee: How It Works, and How It Could Work Better.
- Authors
Seitz, Jr., Collins J.; Sirkin, S. Michael
- Abstract
Stockholders must ordinarily make a demand on their board of directors before initiating litigation on the corporation's behalf. But the litigation consequences of a stockholder demand -- a binding concession of the board's ability to impartially consider a demand are so harsh in the ensuing litigation that stockholders rarely choose that path. The demand requirement is thus falling short of its promise as an internal dispute resolution mechanism. If, as we suggest, stockholders typically avoid making a demand and instead prefer to initiate litigation and raise demand futility arguments, no matter how weak, they deprive independent boards of the opportunity to consider the merits of potential litigation outside the courtroom. We propose a private-ordering solution, in which stockholders and boards can agree, if they choose, to reserve rights on demand futility arguments while a demand review process is undertaken. This would allow boards to engage with stockholders in the review process, and would replace some demand futility litigation with boardroom deliberation, thereby restoring the internal dispute resolution function to the demand requirement.
- Subjects
UNITED States; LEGAL status of stockholders; GOVERNMENT policy on stockholders; DISPUTE resolution; CORPORATION law; BUSINESS enterprise laws
- Publication
Business Lawyer, 2018, Vol 73, Issue 2, p305
- ISSN
0007-6899
- Publication type
Article