Derivative vs Direct under Michigan Law

Derivative vs Direct under Michigan Law

August 18, 2016

It is common for corporate shareholders to bring lawsuits based on alleged wrongdoing by corporate officers or directors. Michigan courts have not squarely addressed whether a derivative or a direct suit is the proper vehicle for such claims. This post will explore some of the different views Michigan courts have taken on this developing issue.

A derivative suit, as defined by the Business Corporation Act, is “a civil suit in the right of a domestic corporation or a foreign corporation that is authorized to or does transact business in this state.” MCL § 450.1491a(a).

In general, a shareholder’s claims for injury to the corporation must be addressed derivatively, subject to special rules/exceptions. However, there are some shareholder suits that may be brought as direct actions. Michigan law makes it difficult to determine the proper form of action in a particular case. In Atlantis Group, Inc, a decision applying Michigan law to this issue, the federal district court stated that “the Sixth Circuit has held that actions in Michigan by shareholders to vindicate corporate rights may only be asserted derivatively.” Atlantis Group, Inc v Alizac Partners, No. 1:90 CV-937, 1991 WL 319384, at *5 (WD Mich August 27, 1991). The court noted two exceptions to this rule: the first applies “where the shareholder suffers an injury separate and distinct from that suffered by other shareholders, or the corporation as an entity,” and the second exception applies “where a special contractual duty exists between the wrongdoer and the shareholder.” Id. A more in-depth analysis of the exceptions to the general rule, that suit be brought derivatively, is found in the ALI Principles of Corporate Governance (specifically in the commentary).

Further intricacies may arise if the suit involves a closely held corporation. Although there is no current Michigan case authority to this effect, Michigan law (under MCL 450.1489(1)) allows shareholders of close corporations to bring direct claims against directors or those in control of a corporation for conduct that is illegal, fraudulent, or willfully unfair and oppressive to the corporation or the shareholder.

When all else fails, Michigan courts can look to Delaware law for guidance on issues of unsettled Michigan corporate law. Glancy v Taubman Centers, Inc, 373 F3d 656, 674 (CA 6 2004). The Glancy court noted: “In the absence of clear Michigan law on matters of corporate law, Michigan courts often refer to Delaware law.” Id. Based on this proposition, when courts examine whether an action presents direct or derivative claims, the proper focus is who suffered the alleged injury, the shareholder directly or the corporation.

 

 

Source:

  • 4.24 DERIVATIVE ACTIONS–GENERALLY, MICLP s 4.24

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