A shareholder derivative lawsuit, also known as a derivative action, is a legal action filed by a shareholder on behalf of a corporation against a third party, typically the corporation’s directors, officers, or other insiders. This type of lawsuit is brought when the corporation itself fails to initiate legal proceedings against those responsible for causing harm to the corporation. In a shareholder derivative suit, the shareholder acts as a representative of the corporation, essentially stepping into the shoes of the corporation to pursue the legal claim. The shareholder is typically seeking to hold the third party accountable for alleged wrongdoing or breach of fiduciary duties, such as fraud, mismanagement, self-dealing, or other harmful actions that have caused damage to the corporation.
The purpose of a derivative suit is to protect the interests of the corporation and its shareholders when the corporation’s management or board of directors fails to take action against those responsible for the harm. The lawsuit is brought in the name of the corporation, with any monetary damages or remedies obtained typically being awarded to the corporation rather than the individual shareholder.
In order to initiate a shareholder derivative suit, certain requirements must typically be met. These requirements can vary depending on the jurisdiction and applicable laws, but they often include …
Shareholder Standing: The shareholder must have ownership of shares in the corporation at the time of the alleged wrongdoing and throughout the duration of the lawsuit.
Exhaustion of Internal Remedies: Generally, the shareholder must demonstrate that they have made a demand on the corporation’s management or board of directors to take appropriate action or show that such a demand would be futile.
Adequate Representation: The shareholder must adequately represent the interests of the corporation and all shareholders similarly situated.
Merits of the Claim: The shareholder must assert valid claims that allege specific wrongdoing or breach of fiduciary duties on the part of the defendants.
Shareholder derivative suits serve as a mechanism to promote corporate governance and accountability. By allowing shareholders to bring legal actions on behalf of the corporation, these suits aim to deter corporate misconduct, protect shareholder interests, and seek remedies for harm caused to the corporation.