Shareholder Derivative Litigation 101

A derivative action is a lawsuit brought by a corporation’s shareholders on its behalf against a third party. Usually, this third party is an inside member, such as a director or board member. Most jurisdictions require that the shareholder files a request to the corporation before bringing suit to resolve it internally. However, there are times when the court lifts this requirement as if the request will be ‘futile’. A request is usually futile when the action is against a director or a majority of directors. This kind of suit makes it futile because the decision to file suit on behalf of the company lies with the directors. This means that the director is basically suing himself and therefore is less likely to go through with the suit. So, what else is there to know about derivative litigation? Read ahead for the rest of our overview of shareholder lawsuits.

When can you sue?

In general, shareholders can only sue on behalf of the corporation if the company refuses to file on behalf of itself. As above, this is because many derivative suits are filed against a particular director or board member for a breach of their fiduciary duties (i.e., the duties placed by law on directors to put client interests ahead of their own).

As we mentioned above, only a shareholder can bring a derivative suit on behalf of their corporation and usually must give the corporation the chance to take on the case for itself before filing. If the corporation refuses and the shareholder files, then it’s up to the court to dismiss it or order a settlement.

What can you recover?

Since shareholders who file these suits do so on behalf of the corporation, it means that they do not get any personal recovery from winning the suit. If they do win, whatever recovery or relief the judge grants goes to the corporation, and the individual shareholder may only get back their attorney fees and costs. However, if the shareholder loses, then they do not get their attorney fees and costs back. This makes shareholder derivative lawsuits fairly risky and therefore uncommon.

Speak with an experienced business law attorney

If you are a shareholder of a business and have concerns about the actions of a third party member, you might not realize that what you should consider bringing is a derivative lawsuit. The first step to take is to consult privately with a business law attorney who can help you to determine whether you have a cause of action worthy of filing the suit. At the Trembly Law Firm, we care about our clients and their individual needs. We will work with you personally to make sure that no stone is left unturned. Contact us at (305) 431-5678 to learn about how we can help you today!