Working Paper No. 08-26:
Presumptive Business Judgment, Substantive Good Faith, Litigation Control: Vindicating the Socioeconomic Meaning of Harhen v. Brown

Author(s):

Harry Hutchison

Date Posted: May 2008

Availability:
Abstract (below) | Full text (most recent) on SSRN

Abstract:

Much legal debate exists as to whether courts should engage in procedural or substantive review of a committee or board's attempt to control the litigation. Opponents argue that the current regulatory framework is insufficient when it comes to precluding the filing of questionable cases. Meanwhile, those wishing to encourage and expand liability rules as a corporate governance mechanism deem the framework as too constrained. In an attempt to address these viewpoints, this Article will examine the Harhen v. Brown case decision to determine if the result, despite its reversal by the Massachusetts Supreme Judicial Court, can be justified or whether the decision is an unsustainable invitation to the courts to substitute their judgment for that of directors.

This Article begins by attempting to establish a defensible framework for evaluating judicial review. The author does so through reference to the nature of the wrongdoing at issue, utilizing Zapata v. Maldonado, as well as by explicating the nature of the social meaning of derivative suits, including judicial review of efforts by firms to control the litigation; and through the application of law and economics analysis. The Article then examines an earlier case, Houle v. Low, that enlarged the scope of the Massachusetts business judgment rule as it relates to decisions to terminate shareholder derivative suits. The Article next examines the Massachusetts Appeals Court's application of Houle v. Low to its Harhen v. Brown decision.

Finally, the author addresses policy considerations, including an examination of the deterrence and compensatory value of derivative litigation, and law and economics to this Harhen v. Brown holding. The author argues that the decision taken in Harhen was justifiable because it has the potential to reduce firm-specific agency costs by encouraging meritorious claims which vindicate the social meaning of such suits by creating public deterrence effects in addition to providing private relief. The author contends that the rules (however indeterminate) derived from this case should be expanded to encompass all (including settlement) decisions taken by special - either prelitigation or contemporaneous litigation - committees and the courts.