Shareholder Derivative Suits

As a shareholder, you are a direct owner of the company. Shareholders like you have legal rights and remedies because you are an owner: you own a piece of the company.

The officers and directors of the company owe you, the shareholder, and the company the highest duties of good faith and fair dealing. They are duties of trust. These duties are usually called “fiduciary” duties and both directors and officers are required by law to fulfill these duties.

There are times when shareholders of a company need to take action to protect their interests, or the interests of the company and other public shareholders (like you). Officers and directors sometimes fail to live up to their duties and obligations. The corporate board may do something that benefits the board, but harms you, the shareholder. Or the company may be engaging in corporate business or activity that harms your interest.

When you or the company is harmed, or those running the company is doing something that is not in shareholders’ best interests, we can help. Your first step: contact us immediately. It doesn’t cost you anything to talk to us, our discussion will be privileged, and we’re happy to speak with you.

We’ll investigate the matter, review options, and discuss solutions. In particular situations where shareholders are harmed or the board is lining its own pockets at the expense of shareholders, litigation is necessary to enforce your legal rights.

One form of shareholder litigation is the shareholder derivative suit. A derivative lawsuit or litigation is a type of lawsuit brought by you, the shareholder, on behalf of the company. The goal of derivative litigation is to remedy injuries to the company, so stockholders sue on the company’s behalf. Money recovered from derivative litigation goes to the company.

A shareholder derivative suit may be brought against the company’s directors and officers who breach their fiduciary duties to the company. The law imposes strict duties upon corporate directors and officers to act in good faith and to exercise their powers for the company’s benefit.

Directors and officers must use reasonable care in making decisions about the company. Directors and officers also owe a duty of loyalty to the company and cannot profit at its expense, such as by diverting a potentially lucrative business opportunity to another business in which a director or officer has an interest. The specific fiduciary duties owed to a company is determined by the law of the state in which the company is incorporated.

Shareholder derivative suits must meet certain procedural requirements before they can proceed to trial. These procedural rules are set forth in the law of the state in which the company is incorporated.

Some states require the stockholder to make a demand on the board of directors to be allowed to proceed with a shareholder derivative suit. The board can either accept or reject the demand. This requirement may be excused if the board has a conflict of interest with the matter at issue.

Please contact us if you have questions or concerns, or if you believe you may need our services.