Combating Shareholder Derivative ActionsOctober 3, 2012 – Articles Corporate Counsel
As day follows night, the filing of a shareholder derivative action follows a press release or securities filing announcing that two public companies will combine in a sale or merger. A potential class of minority shareholders from the target or selling company sues to block the transaction, and typically claims that the price per share is not high enough because the company’s board of directors and advisers undervalued the transaction, or suffered from conflicts of interest and a lack of overall independence. Additional allegations almost always focus on whether the selling company accurately disclosed to its minority shareholders all material information about the sale.
For corporate lawyers and their public clients who are thinking about buying or selling, Pennsylvania law provides a particularly powerful tool to defend against these types of routine shareholder derivative lawsuits. In Cuker v. Mikalauskas (1997), the Pennsylvania Supreme Court approved a framework and procedure that allows the seller to decide for itself whether there is any merit to the claims filed by the minority shareholders.
Cuker starts with the basic proposition that, in the first instance, a decision by a company to file a lawsuit, including a decision by minority shareholders to file a suit on behalf of the company itself, is no different than any other business decision or financial decision that falls within the purview of the company’s board of directors and, as such, deserves the protection of the business judgment rule. Carefully following Cuker may give sellers and their buyers the upper hand over derivative claims.