•  Regular meetings 
•  Power to -- 
• elect and replace directors 
• veto fundamental transactions 
• propose bylaw and other reforms 
•  Voting by proxy 
•  mandatory information 
•  judicial protection 
•  Protection from voting manipulation 

•  Duty of loyalty 
• Not take corporate opportunities 
• Not engage in unfair self-dealing 
• Not entrench board 
•  Duty of care 
• Monitor disloyal management 
• Monitor illegality, act legally 
• Make rational, informed decisions 
•  Limitations 
• Business judgment rule 
• Exculpation for damages, if careless 
• Indemnification, if acted in corp capacity 
• Insurance, unless willful 

Take public corporate litigation, please.  Most shareholder suits (75%) are wholly unsuccessful.  Yet the average suit costs the corporation $500,000 to defend.  At best, shareholder suits are settled -- the settlement amount often covered by D&O insurance.  (And remember who ultimately bears the cost of corporate indemnification and D&O premiums).  Shareholder litigation, however, is good for lawyers on both sides.  Look at the Trans Union case!

Remember that shareholders invested in the corporation expecting rights and protections:

(1) financial rights - participate in cash flow / liquidation rights - receive residual value
(2) voting powers (with information)
(3) fiduciary rights
(4) free transferability powers (in markets)
(5) limited liability immunity

The board refuses the pay dividends and instead pays big executive salaries.  A breach of fiduciary duties -- the creation of correlative rights.  What are rights without remedies!!  Suppose you are thinking of investing.  As you weigh your decision to invest -- your "negotiation" with management -- what remedial provisions would you want in the "corporation" to enforce your rights? By the way, what is a “right”?  See Hohfeldian Logic.

SOLUTION #1  Any shareholder can bring action against scuzzball managers.
SOLUTION #2  The corporation alone can sue scuzzball managers.
SOLUTION #3  A shareholder, on behalf of the corporation,  can sue scuzzball managers.

Return to our problem of executive over-compensation.  What if a shareholder purchases stock after the executives went on their pay binge?   What if the price of the corporation's stock falls after announcement of derivative suit?   What if you own in "street name"?

When shareholder?
Minimum ownership?
Beneficial / record owner?
Creditor?
Approved by other shareholders?
Judicially-approved representative?

   A shareholder may not commence or maintain a derivative proceeding unless the shareholder:

    (1) was a shareholder of the corporation at the time of the act or omission complained of ...
    (2) fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.

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MBCA § 7.40.  SUBCHAPTER DEFINITIONS

   In this subchapter:

   (2) "Shareholder" includes a beneficial owner whose shares are held in a voting trust or held by a nominee on the beneficial owner's behalf.

You are 1% (or even a 20%) shareholder.  You would like to bring a derivative suit on behalf of the corporation to remedy excessive executive pay.  Why bother?  Remember any recovery in a derivative suit goes to the corporation.   Who wins in shareholder litigation?  Is bounty hunting good idea?

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MBCA § 7.46.  PAYMENT OF EXPENSES

   On termination of the derivative proceeding the court may:
    (1) order the corporation to pay the plaintiff's reasonable expenses (including counsel fees) incurred in the proceeding if it finds that the proceeding has resulted in a substantial benefit to the corporation;

You are a 1% (or even 20%) shareholder.  You sue derivatively to remedy excessive executive pay. What if the executives offer you  $10,000 to dismiss the suit?  Don't forget that D&O insurance and corporate indemnification blanket most of their personal liability.  Is the result different if you bring a class action?

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MBCA § 7.45 DISCONTINUANCE OR SETTLEMENT

   A derivative proceeding may not be discontinued or settled without the court's approval.  If the court determines that a proposed discontinuance or settlement will substantially affect the interests of the corporation's shareholders or a class of shareholders, the court shall direct that notice be given to the shareholders affected.

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MBCA § 7.46.  PAYMENT OF EXPENSES

   On termination of the derivative proceeding the court may:

    (2) order the plaintiff to pay any defendant's reasonable expenses (including counsel fees) incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose; or

If the shareholder is suing for the corporation, shouldn't other voices for the corporation be heard.  Consider some possibilities --

 the body of shareholders
 the board of directors
 a committee of disinterested directors

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MBCA § 7.42.  DEMAND

   No shareholder may commence a derivative proceeding until:

    (1) a written demand has been made upon the corporation to take suitable action; and

    (2) 90 days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90 day period.

The board thinks your derivative suit complaining about executive pay is a joke.  It forms a board committee to "study" the matter and to announce the "corporation's position."  Should a court dismiss if the committee recommends dismissal?

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MBCA § 7.44.  DISMISSAL

   (a) A derivative proceeding shall be dismissed by the court on motion by the corporation if [a group] specified in subsection (b) ... has determined in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interests of the corporation.

   (b) ... The determination in subsection (a) shall be made by:

    (1) a majority of independent directors present at a [board] meeting ... if the independent directors constitute a qourum;
    (2) a majority vote of a committee consisting of two or more independent directors appointed by majority vote of independent directors present at a meeting of the board of directors, whether or not such independent directors constituted a quorum.

  (1) nomination or elelction of the director by persons who are defendants
  (2) the naming of the director as a defendant
  (3) the approval by the director of the act being challenged in the derivative proceeding or demand if the act resulted in no personal benefit to the director MBCA § 7.44