Company Shareholders’ Derivative Claims - Protecting the Rights of the Shareholder

Are you a shareholder that wants to redress the harm done by your company’s directors/executive officers?

Then you should consider filing a shareholder derivative claim.

Continue reading more below.

When you invest your hard-earned money in a corporation, you do so with certain expectations. One of those rights is the right to initiate a “derivative action.” A derivative action is a lawsuit that is filed by a shareholder on behalf of the corporation to enforce a corporate right or to prevent or remedy a wrong to the corporation where the corporation, because it is controlled by the wrongdoers or for other reasons, fails and refuses to take appropriate action for its own protection.

Although the board of directors and appointed executive officers run the day-to-day operations of the company, they essentially serve at the pleasure of the shareholders.

Why are derivative suits filed?

This happens when the directors and executive officers are themselves harming the company. These directors and executive members will never sue themselves. In these circumstances, the law allows individual shareholders to file a lawsuit against the directors and officers to rectify the harm done to the company. The individual shareholder stands in the shoes of the company and derives his or her right to sue (hence the name derivative) from the rights of the company itself.

Examples of misconduct that might give rise to a shareholder derivative lawsuit can include, but are not limited to:

• Breach of fiduciary duty;

• Fraud or other unlawful activity;

• Self-dealing or greed by insiders;

• Conflict of interest;

• Waste of corporate assets;

• Accounting wrongdoing;

• Inflated, false, or misleading financial statements;

• Inflated executive compensation; and

• Management or board decisions that expose the company to harm, violate consumer protection or other laws.

What Are the Benefits of a Shareholder Derivative Action?

Most successful shareholder derivative actions produce meaningful corporate governance improvements that are intended to prevent future wrongdoing and increase shareholder value. For example, in a case involving allegations of accounting fraud, the lawsuit may result in the company committing additional resources to oversee its accounting department and outside auditors.

In general, the plaintiff in a shareholder derivative lawsuit does not seek financial compensation, but instead seeks to protect his or her long-term investment in the company by imposing meaningful corporate governance reforms and management changes. If a lawsuit does seek monetary damages (for instance, in a case involving an executive who embezzled corporate assets), any financial recovery obtained goes to the corporation rather than the individual shareholders.

Requirements for Bringing a Shareholder Derivative Action in Florida 

In most jurisdictions across the United States, a shareholder has to fulfil various statutory requirements to prove that he has valid standing to bring a derivative action against the officers and directors, the most important of which is that the shareholder continuously held stock at some time during the period of time in which the company is being accused of fraud, negligence, etc., and that shareholders bringing the derivative actions agree to continue to hold their stock throughout the derivative litigation to preserve their interests in the outcome of the litigation. Other requirements to bring a shareholder derivative action include:

• The shareholder must fairly and adequately represent the interests of the corporation.

• The shareholder must have been a shareholder at the time the alleged misconduct or illegal activity occurred, or received his or her shares from a shareholder who was a shareholder at that time (such as through an inheritance).

• Prior to bringing a lawsuit, the shareholder must first make efforts to rectify the situation with the corporation directly outside of court, and his or her court filings must state specifically what efforts were made, or else explain why no such efforts were made.

• Additionally, once a shareholder brings a derivative action to court, he or she is generally obligated to see the action through to the end without settling the case. The court’s permission is usually required to settle the case or otherwise remove it from the court’s calendar, and other shareholders who could be affected are usually required to be notified.

For years, Colin Blackwood, Esq. has represented many of his clients in various aspects of business litigation. Here, in Florida, Colin Blackwood, Esq. is recognized for his expertise in litigation and for the aggressive representation of his clients.