LITIGATION OF DERIVATIVE STANDING ISSUES IN SUITS IN UNITED STATES FEDERAL COURTS
Shareholder derivative claims – claims belonging to a corporation which are asserted by its shareholders – are common claims in US federal courts. Typically, these claims seek redress for an alleged injury to the corporation caused by an action or decision by the corporation’s directors or officers and can include claims such as breach of fiduciary duty and negligence, among other things. Standing is a threshold issue as to whether a shareholder may prosecute a derivative claim. This issue is often hotly contested, and the governing law can have a profound impact on how the court rules.
In analysing standing in derivative cases, federal courts in the US typically apply the substantive law of the country or state under which the corporation was organised. Courts in some states, like New York, reach this result pursuant to the ‘internal affairs’ doctrine. Under this doctrine, claims involving the rights and liabilities of a corporation – including the rights of shareholders to bring derivative claims – are governed by the jurisdiction of incorporation. Courts in other states, like New Hampshire, apply state statutes that provide that the law of the jurisdiction of incorporation governs derivative claims.
In this article, we compare how US federal courts apply domestic standing rules versus British Commonwealth standing rules. It is easier for shareholders to establish derivative standing under American law than it is under British Commonwealth law. Thus, shareholders considering a potential derivative suit in a US federal court with respect to a corporation organised in a Commonwealth jurisdiction should try to find a path for application of American standing rules, and if that is not possible, should consult with counsel from the Commonwealth jurisdiction to try to develop a theory of derivative standing under the jurisdiction’s standing rules.
Jul-Sep 2024 issue
Friedman Kaplan Seiler Adelman & Robbins LLP