Skeel on The Accidental Elegance of Aronson v. Lewis, and the history of shareholder derivative litigation

David A. Skeel, Jr., University of Pennsylvania, has posted a new paper, The Accidental Elegance of Aronson v. Lewis. Here's the abstract:

Unlike many key corporate law decisions, the 1984 Delaware Supreme Court decision in Aronson v. Lewis was not heralded by stories in the Wall Street Journal and New York Times, nor in any other newspaper of note. Even now, few people other than corporate law experts are likely to recognize the name. Yet Aronson plays a pivotal role in many corporate law decisions that do get a lot more attention. Aronson established the parameters for filing derivative litigation against the directors of a corporation (or a third party, but derivative suits against third parties are now rare). A shareholder who sues derivatively alleges that the directors have breached a duty to the corporation, and seeks to pursue the litigation on the corporation's behalf. In effect, the shareholder argues that the corporation should have brought the suit itself, but because it failed to do so, the shareholder would like to step into the company's shoes. The shareholder's right to sue is based on, or “derivative” of the corporation's right – hence, the name.

Aronson v. Lewis is nested deep within the longstanding effort to devise a framework that sensibly mediates between the competing concerns of encouraging meritorious litigation through the derivative litigation device and screening out strike suits. To provide context, this article briefly surveys the history of the derivative litigation, a history that shows US and UK courts adopting very different stances toward derivative litigation and the policing of corporate directors. In the UK, the principal remedy for directorial misbehavior is private action by large shareholders or intervention by regulators, and courts have repeatedly stymied shareholder litigation. US courts, by contrast, helped to facilitate shareholder litigation. After pausing to consider the rise of federal securities litigation (which is “direct” rather than derivative in nature but poses many of the same problems as derivative litigation), the article focuses on a controversial Delaware Supreme Court case that set the stage for Aronson. The article then explores Aronson itself, and the remarkably effective framework it establishes for addressing derivative litigation.