The classical model, the external forces, and two open questions: where do contingency-fee plaintiffs' firms belong, and what is the proper role of the adjudicating courts?
Modern public-company governance rests on a three-step delegation chain — the “classical model” you would find in a first-year corporate law casebook. It has stood substantively unchanged for more than a century:
Each link in the chain has a different legal character and a different accountability mechanism:
This is the baseline architecture for standard public corporations under state corporate law. It is the architecture the SEC and federal securities laws layer on top of. And it is the architecture the SMU Reincorporation Tracker uses as its baseline reference: every company in the cohort is governed by some version of this three-step chain, regardless of whether it is incorporated in Delaware, Texas, Nevada, or New Jersey.
The classical chain does not run in isolation. A constellation of external forces constrains, monitors, and informs the corporation — without sitting inside the internal governance circle. Each external force has a defined legal or market role: it provides oversight, but it does not direct the corporation.
The diagram captures the load-bearing point: most external forces on the perimeter have a defined channel through which they reach the corporation. The SEC enforces disclosure under Section 14(a) of the Securities Exchange Act and the proxy antifraud rules.1 State corporate law sets the chartering rules.2 PCAOB-registered auditors verify the financial statements. Lenders enforce covenants. D&O insurers price the litigation environment and write retentions and exclusions tied to forum-selection and threshold provisions, so they shape governance through underwriting discipline rather than direct intervention.3 Stock exchanges enforce listing standards. Proxy advisors recommend votes (Texas SB 2337's proxy-advisor disclosure regime was preliminarily enjoined as to ISS and Glass Lewis on August 29, 2025; trial set February 2, 2026).4 Customers, competitors, and stakeholders discipline the firm through markets and reputation. None of these actors pierces the internal governance circle and directs the corporation.
Two external actors are different. Contingency-fee plaintiffs' firms identify the case, finance the litigation, draft the complaint, control much of the litigation strategy, negotiate the settlement, and seek a court-approved fee. The named shareholder is real and the claim is legally a shareholder claim, but the functional initiative may not run from the shareholder. Adjudicating courts are the gate through which private enforcement becomes governance pressure: in representative and derivative cases they decide demand-futility, approve settlements, allocate fees, set fiduciary standards, and issue prospective conduct rules in the form of judicial opinions that bind future boards. Both actors influence corporate behavior in ways that are not easily described as either pure regulation or pure adjudication. Sections 3 and 4 below put each on its own footing.
Private enforcement litigation has produced real recoveries for shareholders in cases like In re Dell Technologies Inc. Class V Stockholders Litigation, where the Delaware Court of Chancery approved a $1 billion settlement and awarded counsel $266.7 million after finding that counsel had “brought a real case, invested over $4 million of real money, and obtained a real and unprecedented result.”5 The Delaware Supreme Court, sitting en banc, affirmed.6 The same opinion that approved the fee, however, expressly recognized the structural problem: “entrepreneurial counsel can profit by filing weak cases on an industrial scale, putting in minimal work, and settling by offering defendants a global release in return for no-cost or low-cost relief plus an agreement not to oppose an attorneys' fee award.”7
The question this section puts to the field is therefore not whether shareholder litigation has value — in cases like Dell Class V it plainly does. The question is narrower and structural: in many representative and derivative cases the claim is legally a shareholder claim, but the functional initiative, financing, litigation strategy, settlement posture, and fee request are driven by contingency-fee counsel rather than by an economically meaningful shareholder principal. That structural reality is what places this actor outside the traditional external-advisor framework. The Texas Senate Bill 29 reforms (effective May 14, 2025) and TBOC § 21.552(a)(3)'s opt-in 3-percent ownership threshold for derivative standing are a deliberate legislative response, not an attack on shareholder enforcement as such.8 The federal court's enforcement of those provisions in Gusinsky v. Reynolds (N.D. Tex. Mar. 17, 2026) is the first meaningful judicial application of that threshold.9
| Dimension | Classical external oversight | Contingency-fee representative model | Court-as-policymaker model |
|---|---|---|---|
| Initiator of action | Shareholder principal identifies a claim and retains counsel. | Counsel identifies the case, recruits or represents a named plaintiff, and finances the litigation.10 | Court announces prospective conduct rules through opinions in cases brought by others. |
| Economic driver | Shareholder wealth protection. | Contingent fee as a percentage of the common fund (26.67% of $1 billion = $266.7 million in Dell Class V).5 | Judicial view of equitable norms; appellate review on abuse-of-discretion standard.6 |
| Where fiduciary duty runs | Director-to-shareholder; counsel-to-client, where the client is an economically meaningful principal. | Counsel's fiduciary duty runs to the class, but the economic stake is the fee pool; the named plaintiff often holds a small relative stake. | Court owes a duty of independent reasonableness review — “heightened judicial scrutiny” on settlement and fee, even absent objection.11 |
| Democratic legitimacy | Principal-agent alignment; shareholder-led. | Weakened principal-agent alignment; attorney-led; legislative correction available (e.g., TBOC § 21.552(a)(3)). | Unelected bench sets prospective rules; legislative correction requires statutory override. |
| Dell Class V locus | Not operative. | Two co-lead firms (Labaton Sucharow; Quinn Emanuel) plus three additional counsel firms, all on contingency; lead plaintiff Steamfitters Local 449 Pension Plan.5 | Vice Chancellor (Laster) decided settlement adequacy and fee; en banc Delaware Supreme Court affirmed.6 |
The thesis: the private enforcement bar should sit outside the internal governance circle, but not outside the governance system. It belongs in a separate, court-mediated enforcement bucket because its power depends on shareholder standing, judicial permission, settlement approval, and fee awards.
Should contingency-fee plaintiffs' firms be treated as external legal advisors hired by shareholders to enforce claims the shareholders themselves choose to assert, or as independent private enforcement actors whose initiative authority has become a functional part of the corporate governance system?
The classical model answers the first way. The modern representative-litigation system often operates closer to the second. Dell Class V shows why the question is hard: the court rewarded counsel for overcoming rational shareholder apathy and producing a major recovery, but the same opinion expressly recognized the danger of lawyer-driven litigation that produces minimal benefit while generating fees.7 Texas SB 29 and TBOC § 21.552(a)(3) respond by allowing covered Texas corporations to adopt a derivative-suit ownership threshold of up to 3% of outstanding shares. The statute does not eliminate shareholder litigation; it raises the economic-stake requirement for derivative standing.8 Gusinsky v. Reynolds is the first meaningful judicial application: a 100-share Southwest Airlines shareholder's derivative complaint was dismissed with prejudice under the company's bylaw-adopted 3% threshold.9
Should courts be treated only as adjudicators of disputes brought by parties with cognizable claims under existing law, or as governance institutions that also shape fiduciary standards, settlement incentives, and private-enforcement economics?
Dell Class V shows that courts are more than passive adjudicators in representative litigation. The Court of Chancery decided whether the settlement was adequate, whether the fee was reasonable, whether counsel should be rewarded for risk, and whether the fee structure would create appropriate incentives.5 The Delaware Supreme Court affirmed that the Court of Chancery has an independent obligation to evaluate fee awards under “heightened judicial scrutiny,” even when class members do not object.11 Beyond Dell Class V, the same Chancery bench has produced Caremark, MFW, and the Tornetta rescission opinion (subsequently reversed in part by the Delaware Supreme Court on December 19, 2025, reducing the rescission remedy and reducing the fee award on remand).12 Each set corporate-conduct rules in advance of legislative action. The Delaware Supreme Court in Maffei v. Palkon (Feb. 4, 2025) further held that business-judgment review applies to a reincorporation vote approved on a clear day, on the doctrinal ground that the hypothetical and contingent impact of another state's corporate law on unspecified future corporate actions is too speculative to constitute the material, non-ratable benefit required to trigger entire-fairness review — though the court expressly reserved the question for cases involving articulable, material steps in furtherance of breaching fiduciary duties prior to redomesticating.13 That is why courts need their own bucket: they are not internal corporate actors, but they are not merely background law either.
Every result on the SMU Reincorporation Tracker — the BHAR studies, the TOST equivalence tests, the calendar-time portfolio alpha estimates, the pairwise firm-fixed-effects comparisons — is conditioned on the governance architecture above. The tracker measures market reactions to changes in the legal infrastructure that surrounds the classical model. Whether the market punishes a firm for raising the derivative-suit standing threshold (it does not, per the published evidence on Southwest Airlines and the broader cohort) is the kind of question only an empirical lens can answer. Whether contingency-fee plaintiffs' firms or adjudicating courts should be inside or outside the circle is a question of legal theory and democratic legitimacy. The two questions are connected: if the empirical evidence shows no governance-quality cost from raising the standing threshold, the legal-theory case for keeping plaintiffs' firms inside the circle weakens. If the evidence shows a cost, the case strengthens. The Tracker's job is to make the question answerable with data, not to prejudge either side.