When school management companies fail: Righting educational wrongs

Journal of Law and Education, Jul 2002 by Conn, Kathleen

The source of definitive pronouncements on the fiduciary duties of directors of for-profit corporations is Delaware's common law."' One obvious advantage of this judicial lawmaking scheme is that it is plaintiff driven. Delaware even releases plaintiffs from shouldering the costs of litigation with a range of fee shifting structures that award attorneys' fees to litigants."' Plaintiff shareholders who wish to sue the corporation, however, must demonstrate that they have sought relief from the corporation before appealing to the courts.139

the litigation committee is subject to the business judgment rule,"' boding ill for the plaintiff's chances of getting to court."' A shareholder plaintiff may plead that the court excuse demand because it would be futile considering the incumbent board of directors, but such pleading must state particularized facts creating a reasonable doubt that the directors were disinterested, independent, or otherwise protected by the business judgment rule." The demand requirement sets a high bar to litigation. However, demand also effectively prescribes a species of alternative dispute resolution that itself may work to a prospective plaintiff's advantage."45

If a plaintiff succeeds in a shareholder derivative suit, only the corporation itself may receive reimbursement for the directors' breaches of fiduciary duties. A shareholder can bring a suit on her own behalf, a direct action, only if she alleges a wrong involving a contractual right that exists independently of any right of the corporation." If a director violates his duty of loyalty by wasting corporate assets, e.g., by arranging to keep his fellow directors in the dark about his personal spending of corporate funds, a student may claim that the director infringed her right to have those funds spent on her education, a right that, as a legal but not real person, the corporation cannot claim. How a court would view such a claim is uncertain.

Finally, students who collectively suffer diminishing successes on statemandated examinations during an extended period of attendance at public charter schools or schools managed under contracts by school management corporations, as contrasted with peers in traditional public schools, may institute a class action suit against the directors of the corporation for breaches of the duties of care and loyalty, as relevant. Again, how courts will view class action suits for collective educational malpractice is uncertain.

E. Rescissory Damages

Education Act (IDEA)."47 Compensatory education would be especially appropriate where a school's charter was revoked so that the school no longer existed. 148

Corporate law provides a spectrum of both actual and equitable damages particularized for the many different contexts in which valuation issues arise."49 Some, such as the appraisal remedy available in the merger context,"' do not pertain to suits potentially initiated by students deprived of educational opportunities. Absent fraud, however, other remedies available for breaches of fiduciary duty are pertinent. Courts may impose equitable remedies or award monetary damages."' Damages may be compensatory or rescissory. In some cases, courts may not require proof of injury.