Shareholder Derivative Action - Acting to Protect a Corporation
Since corporations are considered as entities with their own obligations and rights, they also have the right to sue and be sued. It means that since a corporation is considered a separate body from the incorporators, it may file a lawsuit when something detrimental to its operations has been done. However, in cases where a corporation’s board opts not to sue an erring member, shareholders may file a lawsuit in behalf of the corporation. This is called a shareholder derivative action.
The subjects of shareholder derivative action are usually the officers and directors of the corporation, and it is usually about violations of fiduciary duties that are owed to the shareholders. Since officers have significant control over the corporation’s policies, it is unlikely that they will bring legal action against themselves.
Fiduciary duties refer to a legal relationship of trust and confidence between parties; some examples of cases are illegal disbursements, misusing company assets, unnecessarily excessive compensation given to officers, corporate waste and the likes.
A shareholder derivative action is based on the principle that shareholders and owners have the right to have a part of the business’ earnings and to check its financial records. As such, anybody who has bought shares in the company have the right to make a shareholder derivative action.
Shareholders do not need to have a large financial stake or control a major part of the shares to be able to start a derivative action. Since the shareholder’s rights to participate in governing the operations of a corporation are limited, they are not allowed to sue in their own name but rather in behalf of the corporation.
Since derivative action can be brought forward by one or more shareholders, this would also prevent multiple lawsuits. At the same time, this ensures that all shareholders affected will benefit from the recovery.
The circumstances in filing a shareholder derivative action in the US are as follows:
• A shareholder finds it offensive or upsetting that the board of directors had not filed a complaint against a person or persons that have done something harmful towards the corporation
• Section 7.42 of the MBCA (Model Business Corporation Act) requires the shareholder to file a demand to the corporation
• The shareholders should wait 90 days after filing the demand
• If no action has been made after the requisite 90 days, shareholders must meet requirements to move forward with a lawsuit
• If the shareholders meet the requirements to move forward with a lawsuit, the corporation’s board may now appoint a “special litigation committee” which in turn may move to dismiss
Almost all states have laws that require shareholders to show proof that they have made good faith effort to resolve the issue before going to court.
Most of the time, shareholder derivative suits are resolved out of court and do not need to go to trial anymore. Attorney fees are usually negotiated as a part of the settlement of a derivative action.
For shareholders planning to file a shareholder derivative action, it is best to contact an attorney that has relevant experience in dealing with this kind of action.
Our skilled Los Angeles corporate and business attorneys handle business litigation issues such as shareholder derivative action. For consultation, visit our website at http://www.mesrianilaw.com/Los-Angeles-Corporate-Business-Lawyers.html and avail of our free case analysis.
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