How Adverse Domination Works

Adverse domination works by countering the provisions of the statute of limitations. The statute of limitations indicates the maximum time following an event within which the parties in a dispute can initiate legal proceedings. The statute expires after a given period, varying by jurisdiction. The courts lose jurisdiction over the case after this period. But, applying the adverse domination doctrine extends the statute of limitation.

The types of misconduct that trigger adverse domination are:

  • Fraud
  • Intentional misconduct that causes losses
  • Willful misconduct that causes unjust enrichment of directors

The doctrine is not applicable if the shareholders and the non-culpable directors knew of the culpable director's misconduct. The doctrine only works if the company has unearthed new information to use against company directors and officers responsible for their misdemeanor.

Adverse Domination Real World Example

The U.S. courts revived the doctrine of adverse domination in the 1990s under the 1989 Financial Institutions Reform Recovery and Enforcement Act provisions. The Resolution Trust Corporation (RTC) was given the mandate to go after former directors of companies who drove their companies into insolvency. Insolvency is the condition where a company is unable to meet its financial obligations. The company must sell its assets to pay off its debts, and the business closes down.

There are a few instances where the court declined to uphold adverse domination. In Clark v. Milam presented to the U.S. District Court in Southern West Virginia, the court dismissed a request the plaintiffs made to enforce the adverse domination order. The plaintiffs knew, to some degree, about the former director's attempts to take over the company. The plaintiffs' participation disqualified them from pursuing the case against the former directors.

Significance of Adverse Domination

Adverse domination is important because it allows companies to identify the causes of their past injuries. Employees may not have been able to spot anomalies in the company before culpable executives stop working at the company. But, once they leave, the company gets the opportunity to investigate and unearth the truth regarding its past failures. This process may go way beyond the normal statute of limitations, so adverse domination is crucial.

Second, the adverse domination doctrine allows the company to evaluate the conduct of the former directors who were 'untouchable' while in office. Since it is difficult to collect evidence while the directors are in power, the adverse domination doctrine allows the company to seek justice against former company directors.

Third, adverse domination is significant because the company directors cannot sue themselves. The courts understand that the directors cannot take any action against themselves even if they recognize their wrongdoing. So, the time to undo the wrongs would be after the company directors have left the company. Lastly, the doctrine of adverse domination absolves junior employees of any responsibility for the company's failure.