USA Law and Practice Contributed by: Kai Liekefett, Derek Zaba, Ram Sachs and Evan Grosch, Sidley Austin
more than one judge has put it, “the rare exception” (see, eg, In re Williams Commc’ns Grp., Inc, 281 B.R. 216, 223 (Bankr. S.D.N.Y. 2002) ) – or proving that the committee has made a “substantial contribution” to the case (see 11 USC §§ 503 (b)(3)(D), (b)(4)), pro- fessional fees for equity committee representatives, such as counsel and financial advisors involved in bankruptcy court litigation, will be the direct financial responsibility of committee members. In conjunction with or in the absence of a path to long- term value, shareholders also have the ability to assert rights against directors and officers in both derivative and direct claims – a path that is potentially clearer following the Supreme Court’s recent decision invali- dating non-consensual third-party releases in Purdue Pharma (see Harrington v Purdue Pharma L. P., No. 23-124, 2024 WL 3187799 (US 27 June 2024) ). Even in bankruptcy cases where there is no remaining value in the company itself, courts may permit and/ or companies may consensually agree to pursue cer- tain claims to the extent of available D&O insurance, thereby allowing shareholders to tap an alternative source of recovery. Again, however, shareholders can and should consult with restructuring or bankruptcy counsel relatively early in the process in order to fully understand paths to recovery via D&O claims in an insolvency or Chapter 11 scenario. Shareholders may claim that directors, officers or oth- er fiduciaries breached their fiduciary duty to share- holders. These claims can take two forms: direct and derivative. A direct suit is a claim made by a shareholder directly against a director or officer who has alleg- edly breached a fiduciary duty owed to shareholders, leading to actual injury to the plaintiff. A derivative suit is a claim made by a shareholder on behalf of the company. Courts distinguish between direct and derivative suits by evaluating two factors: 10. Shareholders’ Remedies 10.1 Remedies Against the Company
• the party experiencing the harm; and • the party entitled to relief.
In a direct suit, the shareholder has been directly harmed, and as such, the shareholder is entitled to damages. In a derivative suit, on the other hand, the company has been harmed and is, therefore, the entity entitled to relief. Importantly, the pleading standard for a derivative suit is more onerous than the pleading standard for a direct suit. Under the applicable rules, a derivative complaint must do both of the following: • state with particularity any effort by the plaintiff to obtain the desired action from the defendant and the reasons for not obtaining such action; and • allege facts supporting a reasonable inference that the plaintiff has standing to sue derivatively under the laws governing the company. This standard requires that the plaintiff file a demand on the board, and only following the board’s rejection or inaction can the plaintiff move forward with the derivative action. In some cases, shareholders may name the company as a party to an action concerning alleged breaches of duties to achieve relief that would not be possible without the company (eg, as a nominal defendant in a derivative action).
10.2 Remedies Against the Directors See 10.1 Remedies Against the Company . 10.3 Derivative Actions See 10.1 Remedies Against the Company .
11. Shareholder Activism 11.1 Legal and Regulatory Provisions Shareholder activism operates under a multi-part legal framework encompassing the following. • State corporate law, which is determined by the company’s jurisdiction of incorporation. • Federal securities law, particularly disclosures required by both investors and publicly traded
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