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Fordham Journal of Corporate & Financial Law

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The quintessential derivative suit is a suit by a shareholder to force the corporation to sue a manager for fraud, which is admittedly an awkward and likely unpleasant endeavor and, according to the Supreme Court, a "remedy born of stockholder helplessness."* 1 Where ownership and control of an enterprise are vested in the same population, the need for a corrective mechanism like a derivative suit is greatly lessened because the owner/managers' self-interests will arguably guide managerial conduct. But where ownership and control are in separate hands, the incentives change, and managerial conduct may not conform to the owners' views of the best course of action. This may lead to what the owners consider to be director misconduct. The existing corporate laws have not been effective in stopping this kind of director misconduct, so "stockholders, in face of gravest abuses, were singularly impotent in obtaining redress of abuses of trust."2 In these situations, shareholders are arguably in need of legal strategies to protect themselves from abuses by management. Presumably in an effort to limit the abuse of strike suits that would take up managerial time, resources, and corporate dollars, several significant procedural hurdles for derivative plaintiffs have arisen, including the requirement of contemporaneous share ownership--a requirement that derivative plaintiffs make a "demand" on the corporation, in particular, to take requested action--the lack of access to the discovery process, and compliance with any relevant security for expense statutes. Balancing the right of shareholders to hold their directors accountable against the need for directors to have the freedom and autonomy to discharge their statutory and fiduciary duties is no easy feat. That said, these hurdles, when combined, may erode or even undermine the ultimate utility of the derivative litigation process. This Article provides an evaluation and analysis of one of the primary procedural roadblocks facing derivative plaintiffs as they seek to hold their corporations accountable: the security for expense statute. The Article compares existing security for expense statutes in nine states, while offering observations on those challenges present in the current statutes, as well as new challenges flowing from the statutes. The Article also evaluates the limited amount of case law flowing from the statutes, as part of an evaluation of the usefulness of this mechanism as a gatekeeper in derivative litigation. Finally, the Article provides recommendations for legislative reform and modifications to existing doctrine to help further the goals of shareholder empowerment through the derivative litigation process, while keeping the potential for strike suits in check. [ABSTRACT FROM AUTHOR]

1 Professor of Skills, Maurice A. Deane School of Law, Hofstra University

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