Question
Principals are normally free to dismiss their agents at will or to modify their agency instructions at will unless there are third-party interests involved or
Principals are normally free to dismiss their agents at will or to modify their agency instructions at will unless there are third-party interests involved or unless the agent has provided consideration for the agency relationship. For example, think of how a shareholder (the principal) may revoke a proxy from a proxy holder (the agent) unless the proxy is "coupled with an interest," as we have already studied. One way to analyze corporate structure is to recognize that shareholders are agency principals who choose directors to serve as their agents in the task of running the corporation. Thus, one would expect that shareholders should be able to revoke or modify the authority of the directors at will unless there are third-party interests involved or the directors have provided some consideration for their positions. Looked at from these perspectives, a shareholder derivative suit is one in which one or more shareholders are attempting to revoke the authority of the board of directors to refuse to pursue a particular lawsuit--the one that the shareholder wants the corporation to bring but that the board is declining to bring on behalf of the corporation. Yet despite the agency principles mentioned above, courts make it difficult for the shareholder to take back that authority to bring suit, imposing barriers like the demand requirement, the contemporaneous ownership rule, special litigation committees, and the Business Judgment Rule. In the context of these agency principles, please explain why the law makes it so difficult for shareholders to take back a measure of litigation authority from the directors.
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