Shareholder Derivative Suits: How Permissible and How to Go About Them

Sometimes corporations go astray. Directors and officers may sometimes engage in actions that are not in the best interests of the corporation, or may even be considered illegal. Many times, the directors and officers responsible for these actions will not be willing to accept the fact they are guilty of wrongdoing. Therefore, it is up to others in the organization to ensure the corporation is acting properly. Usually, it is the shareholders who wish to rectify a wrongdoing. After all, it is in their best interests to ensure their investment is acting properly. However, for a shareholder to be able to take action against individuals within the corporation, there are strict procedures for them to follow before ultimately bringing forward a shareholder derivative suit.

The process of bringing forth a shareholder derivative suit begins with approaching the board of directors. By statute, shareholders are required to go to the board of directors and explain their claims. At this point, they will seek out directors to commence a lawsuit on behalf of the corporation. It is believed shareholders represent the interests of the corporation, and thus taking this step means that there is some serious wrongdoing that needs to be investigated.

Once the board of directors is notified of possible wrongdoing, they often times create a special litigation committee. The special litigation committee is an independent body that investigates any claims shareholders have. This committee must be independent and exhibit good faith in its investigation. Different factors are used prove independence, including fees, business relationships, and personal relationships. The committee will then make a determination whether litigation is in the best interests of the corporation. Even if a committee determines it is not in the corporation’s best interests, the shareholder alleging wrongdoing can still challenge the decision in court. However, if directors can prove the committee was truly independent, then the litigation will not be allowed to proceed.

Shareholder derivative suits are a wonderful tool for shareholders to ensure the corporation is being run correctly. However, there are some very rigid routines that must be followed for a shareholder derivative suit to proceed. Consulting a business lawyer with years of experience can help ensure a suit proceeds properly. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.