THE DEMAND ON DIRECTORS REQUIREMENT AND THE BUSINESS JUDGMENT RULE IN THE SHAREHOLDER DERIVATIVE SUIT: AN ALTERNATIVE FRAMEWORK.

The shareholder derivative action is generally regarded as a useful and necessary device by which shareholders of corporations may deter and remedy abuses of corporate power. Nevertheless, the derivative action has been viewed by many with suspicion. This suspicion has manifested itself in a number of restrictions which hinder the ability of shareholders to bring derivative actions. Among the restrictions are the demand rule and the business judgment rule. The demand rule requires shareholders to seek redress or action from the board of directors prior to commencing a derivative action. The business judgment rule adds a degree of finality to the decision of the board of directors on whether to commence legal action against alleged corporate wrongdoers by blocking derivative suits absent allegations that the board of directors failed or were unable to exercise sound business judgments. The finality of the director's decision has been strengthened by recent decisions which enable a "special litigation committee" to exercise the veto power otherwise vested in the board of directors. The litigation committee may consist of even a minority of the total board and may consist of outside consultants. The primary substantive restraint on the committee is that it be able to act in a detached and disinterested manner. First, this article will suggest that the restrictions on the shareholder derivative suit, particularly the nearly absolute power of the board of directors to block such suits, are largely unnecessary and confusing. Second, it will be demonstrated that the board of directors can easily abuse its power under current doctrines. Last, this article will suggest alternatives which may be more effective and desirable. This article will concentrate on shareholder derivative actions in federal courts. The discussion will focus on derivative claims against corporate insiders; suits involving third parties are beyond the scope of this article. In addition, the... [ABSTRACT FROM AUTHOR]