Shareholder Suit Dismissed

A group of shareholders brought a derivative action on behalf of a corporation they owned against the corporation's officers for breach of fiduciary duty, alleging that the officers failed to sue another company that allegedly stole trade secrets from the corporation. An independent review committee formed by the board had decided that it was not in the corporation's interest to bring that lawsuit. The court dismissed the derivative action.

WHY THIS IS IMPORTANT… Shareholders cannot enforce a corporation's rights. They can only bring the suit derivatively in the corporation's name. Massachusetts law, like most states, authorizes the board of directors to appoint an independent committee to determine whether what the shareholders want done is in the corporation's interest. Where an independent committee determines it is not in the corporation's interest, it is improbable that the shareholders will be able to pursue that matter. The court ruled that Massachusetts law was such that once an independent committee decided the issue, the business judgment rule prevented the court from overruling the corporation's decision.