Scarlett — Volume 61, Issue 4

Scarlett examines the historical origins and theoretical foundations of shareholder derivative litigation in response to early 21st-century corporate scandals including Enron, WorldCom, and stock options fraud. The shareholder derivative action allows shareholders to sue on behalf of the corporation to hold directors and officers accountable for corporate mismanagement or waste. The article frames corporate governance debates around fundamental questions: Does a corporation exist to benefit shareholders, managers, employees, customers, or the public? Should directors have complete authority, or can shareholders challenge their decisions? These questions have animated corporate law since the early 1900s when proliferation of public corporations created passive shareholders with no active management role. Scarlett traces the historical debate over corporate purpose through shareholder derivative litigation, arguing that modern scholars have ignored its origins reflected in pre-twentieth-century shareholder suits. The article remedies this gap by examining English and U.S. law on shareholder derivative actions to establish their true historical and normative foundations. The debate involves competing models: shareholder primacy (corporation owned by shareholders, directors maximize shareholder wealth); director primacy (board makes decisions, serves as nexus of contracts); and stakeholder theory (directors mediate between shareholders, employees, customers, suppliers, and other affected parties).

Topics: Corporate Law · Legal History

Keywords: shareholder derivative litigation · corporate governance · director primacy · shareholder primacy · Dodd-Frank · stakeholder theory · corporate purpose · Securities and Exchange Commission