In his capacity as an AIG shareholder (via his company Starr International), former AIG boss Hank Greenberg has filed a derivative suit against the federal government on AIG's behalf, in which he alleges that the federal government's takeover of AIG violated the Takings Clause by taking shareholder property without compensation. Greenberg recently filed a deamnd on AIG's board asking them to take up the suit.
Predictably, this outraged the know nothing left, including various Democrat congress people:
Democrats responded with outrage Tuesday to reports that insurance giant American International Group (AIG) might sue the federal government over the terms of its 2008 bailout.
Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) called the potential $25 billion shareholder lawsuit "outrageous" and "unbelievable."
I expect this sort of thing from the Occupy Wall Street twits, who haven't bothered to learn anything about the institutions they're attacking, but I expected better from former Harvard bankruptcy law professor Liz Warren. But it seems she knows as much about corporate law as she does about her Cherokee ancestry.
Let me make it very simple: If Greenberg is going to have an opportunity to ventilate the very serious and legitimate concerns raised by his suit, he had no choice but to ask AIG's board to consider joining the suit and, once he did so, AIG's board had no choice but to consider doing so.
As I explain in Corporation Law, there are two types of shareholder litigation.
“Direct” shareholder suits arise out of causes of action belonging to the shareholders in their individual capacity. It is typically premised on an injury directly affecting the shareholders and must be brought by the shareholders in their own name. In contrast, a “derivative” suit is one brought by the shareholder on behalf of the corporation. The cause of action belongs to the corporation as an entity and arises out of an injury done to the corporation as an entity. The shareholder is merely acting as the firm’s representative.
The basic test for distinguishing direct and derivative suits is: Who suffered the most immediate and direct injury? Note that it is not enough for a shareholder to allege that he was injured because the challenged conduct resulted in a drop in the corporation’s stock market price.
Here, the principal claim is that the government took AIG property without compensation and thus violated the Takings Clause. The initial injury thus was suffered by AIG. The injury to Greenberg and his fellow shareholders was derivative of that prior harm. Hence, this was a derivative suit.
The law provides that shareholders may not bring suit unless they first make demand on the board of directors or demand is excused. The demand need not be in the form of a pleading nor a detailed as a complaint, but rather simply must request that the board bring suit on the alleged cause of action. There being no facts here to excuse Greenberg from making demand, he was legally bound to make demand on the AIG board.
Once Greenberg did so, moreover, the board is legally obligated to undertake a two-step process. Rales v. Blasband, 634 A.2d 927, 935 (Del. 1993). The board must first inform itself of the relevant facts relating to the challenged transaction or other alleged wrongdoing, as well as the legal and business considerations attendant to resolving the matter. Any factual investigation must be reasonable and conducted in good faith, but within those parameters the board has great discretion. Levine v. Smith, 591 A.2d 194, 213-14 (Del. 1991). Having done so, the board must elect amongst the three principal alternatives available to it: (1) accepting the demand and prosecuting the action; (2) resolving the matter internally without resort to litigation; or (3) refusing the demand. See Weiss v. Temporary Inv. Fund, Inc., 692 F.2d 928, 941 (3d Cir. 1982) (identifying alternatives), vacated on other grounds, 465 U.S. 1001 (1984).
Critical to the current dispute, the Delaware supreme court has held that when a board of directors is confronted with a derivative action asserted on its behalf, the board cannot stand neutral. It must take one of the three alternatives. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d 726, 731 (Del. 1988).
Whether or not AIG's board should have accepted Greenberg's demand is a question on which reasonable people can differ, but the left's attack on that board for even considering doing so is as lawless as the AIG takeover itself. Democrat congressmen Peter Welch of Vermont, Michael Capuano of Massachusetts and Luis V. Gutierrez of Illinois, for example, told AIG's board:
According to The New York Times, AIG is actively considering suing the U.S. government for monetary damages after American taxpayers rescued your company from its reckless conduct with a $182 billion bailout.
Don’t do it.
Don’t even think about it.
In other words, they told AIG's board to break the law. As did Congresswoman Maxine Waters:
I would urge the board to drop its consideration of the lawsuit, thank the American public for the $182 billion rescue package that prevented the company’s collapse and support the reforms in the Dodd–Frank Wall Street Reform and Consumer Protection Act that ensure that systemically important financial institutions can no longer hold our economy hostage.
By the way, Waters is in line to take over the House Financial Services Committee if the Democrats take the House in 2014.
I find this sort of political grandstanding appalling. The AIG board did what the law required it to do. If the rule of law means anything in the Obama era, the AIG board should be commended--not pilloried--for having done so.