A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation. Generally, a shareholder can only sue on behalf of a corporation when the corporation has a valid cause of action, but has refused to use it. This often happens when the defendant in the suit is someone close to the company, like a director or a corporate officer. If the suit is successful, the proceeds go to the corporation, not to the shareholder who brought the suit.
We have years of experience litigating these types of actions. We have successfully obtained interim injunctions against a board of directors in a lawsuit seeking damages for breach of fiduciary duties, and we have counseled boards to develop the proper processes and procedures to protecting against and handling these types of actions.
In a shareholder derivative action, an individual or institutional shareholder, serving as a representative plaintiff, takes legal action on behalf of the corporation. The shareholder derivative action is typically brought against insiders of the company, such as the executive officers, directors, and/or board members, who are suspected of misconduct or other acts that cause harm to the corporation. A shareholder derivative action allows shareholders to redress harm to the corporation caused by management where it is unlikely that management will redress the harm itself. By filing a shareholder derivative action, a single shareholder may be able to compel changes that otherwise might not happen at the company, such as pro-investor corporate governance reform, removal of officers or directors whose misconduct injured the corporation, and monetary payments in the form of damages and/or disgorgement (recovery) of ill-gotten gains.
Corporate misconduct harms not only shareholders, but also the financial markets by driving down stock prices, decreasing shareholder value, and creating mistrust among investors. Past revelations of corporate fraud, including Enron, WorldCom, Tyco, the options backdating scandals, and the recent misconduct that precipitated the U.S. economic crisis, have increased the need to enforce the legal duties of loyalty and good faith that corporate directors and officers owe to their shareholders. Shareholder derivative actions provide greater accountability for shareholders, inspire investor confidence in the financial markets, and protect companies and shareholders from further harm.
Types of claims asserted in shareholder derivative actions include, for example:
Breaches of fiduciary duty
Fraud or other unlawful activity
Self-dealing or greed by insiders
Conflict of interest
Waste of corporate assets
Inflated, false, or misleading financial statements
Improprieties related to executive compensation
Management or board decisions that expose the company to harm or risk (e.g., violations of consumer protection laws, environmental violations)
We know business, we mean business. If you believe that a board of directors is engaging in improper conduct harmful to the business, or if you are a board of directors that has been sued in a shareholder derivative action, we have the skill and experience to vigorously represent your rights.