Pennsylvania Codifies Standards for Derivative Actions: What It Means for Shareholder Litigation in Pennsylvania

April 19, 2017
Signed into law in November 2016, Pennsylvania’s Act 170 became effective as to all Pennsylvania corporations at the beginning of this month. Among Act 170’s most important provisions are changes and clarifications to the initiation and conduct of shareholder derivative lawsuits in Pennsylvania.

Before Act 170, Pennsylvania statutory law provided little guidance as to suits filed by shareholders derivatively on behalf of the corporation. Two decades ago, in Cuker v. Mikalauskas, the Pennsylvania Supreme Court attempted to fill in the gaps left by the statutory corporate law. In Cuker, the Court adopted the ALI Principles of Corporate Governance and provided that a board’s decision “regarding litigation by or on behalf of a corporation, including shareholder derivative actions, are business decisions as much as any other financial decisions” and therefore “are within the province of the board of directors.” Cuker required shareholders to serve a demand on the corporation before filing suit and stated that where a corporation’s board of directors forms a special litigation committee (“SLC”) to investigate the claims made in a demand, Pennsylvania courts will not second-guess the corporation’s decisions if the members of the SLC are independent and disinterested, if the SLC was assisted by counsel, prepared a report and conducted an adequate investigation and if the SLC’s determination on the demand is made in good faith.

Act 170 makes clear that Cuker remains good law in Pennsylvania, codifies certain requirements set forth by the Pennsylvania Supreme Court in that case, and adds new requirements. Pennsylvania corporations should not overlook Act 170’s important provisions concerning shareholder litigation, which differ from Delaware’s standards and procedures governing shareholder derivative litigation in several important respects.

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