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Birmingham Bar Association Bulletin - Summer 2014

Corporate Law a claim. Because the claim is prosecuted on behalf of the subsidiary, both the parent and subsidiary are necessary parties to the action. 12 To avoid a situation where no court had jurisdiction over both the parent and the subsidiary, courts have ruled that it must have jurisdiction only over the subsidiary on whose behalf the claim is being asserted.13 The subsidiary need not be wholly-owned by the parent company, but it must be “controlled or dominated” by the parent company.14 Where the parent and the subsidiary are incorporated or domiciled in different states, choice of law issues may arise. The court should apply the law of a single jurisdiction to avoid “complicating or distorting the judicial inquiry.”15 The right to bring a double derivative suit and other procedural requirements should generally be determined by the law of the state in which the parent company is incorporated. 16 By contrast, the substantive choice of law will generally be governed by the state of incorporation of the subsidiary on behalf of which the claim is being asserted. 17 In instances where Alabama has a more significant relationship to the parties or the claims than the subsidiary’s state of incorporation, a court may apply Alabama’s substantive corporate law.18 Another challenging issue in double derivative actions is determining to whom and in what form a presuit demand must be made. The presuit demand must be addressed to the directors of the parent company. 19 The form of the presuit demand is generally governed by the law of the state of incorporation of the parent company.20 As with a regular derivative action, the presuit demand may be excused as futile if it can be shown that the directors of the parent corporation are “incapable of making an impartial business judgment regarding the subsidiary’s claim.”21 The focus in determining whether presuit demand is futile is the director’s interest in the decision about whether to sue, not his interest in the challenged transaction.22 Often, corporations in these convoluted family trees share a common set of directors and officers. As a result, it can be difficult to tell which company the directors and officers are representing when conducting corporate affairs. While this is often the case, the parent company and subsidiary do not need to have identical boards of directors to maintain a double-derivative action. A double derivative action is not unlike the better-known equitable theory, “piercing the corporate veil” because both theories ask the court to “disregard corporate legal fictions . . . used as a shield for wrongful acts.”23 However, there are some significant differences between the two. In order to pierce the corporate veil, a plaintiff must demonstrate that the parent corporation is the alter ego of a corporation, and that corporation is set up as a “subterfuge” or “fraud in asserting corporate existence.”24 Such a showing is not necessary to proceed on a double derivative action. In short, complicated corporate form and layering provides no safe harbor to directors, officers, and majority shareholders who breach duties owed to related companies or shareholders. Aggrieved shareholders have standing to pursue their real, but indirect, damages through the double derivative action.G ENDNOTES 1 E.g., Pegram v. Hebding, 667 So. 2d 696, 702 (Ala. 1995). 2 Ala. R. Civ. P. 23.1. 3 Bivens Gardens Office Bldg., Inc., v. Barnett Banks of Fla., Inc., 140 F.3d 898, 910 n.5 (11th Cir. 1998). 4 Blasband v. Rales, 971 F.2d 1034, 1043 (3d Cir. 1992) (quoting 13 Fletcher Cyc. Corp. § 5977) (cited in Stallworth v. AmSouth Bank of Ala., 709 So. 2d 458, 463 (Ala. 1997)). 5 Id. 6 See, e.g., Brown v. Tenney, 532 N.E.2d 230, 234 (Ill. 1988) (“The double derivative action is a long-standing doctrine of equity jurisprudence, having been woven into the quiltwork of equitable principles covering shareholder-corporate relations over a century ago.”); Sternberg v. O’Neil, 550 A.2d 1105, 1107 (Del. 1988); Webre v. Sneed, 358 S.W.3d 322, 334 (Tex. App. 2011); Prof ’l Mgmt. Assocs., Inc. v. Coss, 598 N.W.2d 406, 414 (Minn. Ct. App. 1999). 7 West v. West, 825 F. Supp. 1033, 1055 (N.D. Ga. 1992) (noting that “the normal double derivative suit involves a plaintiff bringing suit based upon stock ownership in a parent corporation and thereby seeking to enforce the rights of the subsidiary corporation”). 8 Brown, 532 N.E.2d at 235. 9 West, 825 F. Supp. at 1055; see also In re Bear Stearns Cos., Inc. Sec. Deriv. & ERISA Litig., 763 F. Supp. 2d 423, 538 (S.D.N.Y. 2011) (dismissing a case for lack of allegations that the subsidiary’s actions harmed the parent corporation). 10 In re Merrill Lynch & Co., Inc., Sec., Deriv. & ERISA Litig., 773 F. Supp. 2d 330 (citing Lambrecht v. O’Neal, 11 A.3d 1180, 1205–07; but see Silver v. Allard, 16 F. Supp. 2d 966, 969 (N.D. Ill. 1998) (requiring demand on subsidiary as well). 11 Brown, 532 N.E.2d at 235. 12 Hamilton Partners, L.P., v. Englard, 11 A.3d 1180, 1199 (Del. Ch. 2010). 13 Id. 14 Brown, 532 N.E.2d at 235. 15 Sternberg v. O’Neil, 550 A.2d 1105, 1123 (Del. 1988). 16 Batchelder v. Kawamoto, 147 F.3d 915, 920 (9th Cir. 1998). 17 See Hamilton Partners, L.P., 11 A.3d at 1213 (applying Delaware law to claims involving a Delaware subsidiary owned by a foreign parent corporation) (quoting Sternberg, 550 A.2d at 1125). 18 See Ex parte Bentley, 50 So. 3d 1063, 1070– 74 (Ala. 2010) (discussing the Restatement (Second) Conflict of Laws, particularly section 309). 19 Rales v. Blasband, 634 A.2d 927, 932–35 (Del. 1993). 20 Scrushy v. Tucker, 70 So. 3d 289, 299–303 (Ala. 2011). 21 Villari v. Mozilo, 146 Cal. Rptr. 3d 556, 562 (Cal. Ct. App. 2012). 22 In re Amerco Deriv. Litig., 252 P.3d 681, 697–700 (Nev. 2011). 23 Brown v. Tenney, 532 N.E.2d 230, 234 (Ill. 1988). 24 Econ Mktg., Inc. v. Leisure Am. Resorts, Inc., 664 So. 2d 869, 870 (Ala. 1994). Birmingham Bar Bulletin/ Summer 2014 27


Birmingham Bar Association Bulletin - Summer 2014
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