A shareholder derivative lawsuit is a legal action brought by a shareholder on behalf of a corporation against the corporation's directors, officers, or other individuals for breaches of fiduciary duty or other wrongs committed against the corporation. These lawsuits are complex and require careful consideration of various factors. Here are 10 tips for navigating shareholder derivative lawsuits:
Understanding the Basics of Shareholder Derivative Lawsuits
Before diving into the complexities of shareholder derivative lawsuits, it’s essential to understand the basics. Shareholder derivative lawsuits are brought by shareholders to rectify wrongs committed against the corporation, such as breaches of fiduciary duty, mismanagement, or self-dealing. The lawsuit is typically filed in the name of the corporation, but the shareholder bringing the lawsuit is the one who initiates and controls the litigation. Fiduciary duty is a critical concept in these lawsuits, as it refers to the obligation of corporate directors and officers to act in the best interests of the corporation and its shareholders.
Pre-Lawsuit Demand and Demand Futility
One of the key considerations in shareholder derivative lawsuits is the pre-lawsuit demand requirement. In most jurisdictions, a shareholder must make a demand on the corporation’s board of directors to take action before filing a lawsuit. However, if the board is not independent or not disinterested, the demand may be deemed futile, and the shareholder may be excused from making the demand. Understanding the nuances of demand futility is crucial in determining whether a pre-lawsuit demand is required.
| Pre-Lawsuit Demand Requirement | Applicability |
|---|---|
| Independent Board | Required |
| Non-Independent Board | May be excused |
| Demand Futility | Excused if board is not independent or disinterested |
Key Considerations in Shareholder Derivative Lawsuits
When navigating shareholder derivative lawsuits, several key considerations come into play. These include:
- Standing: The shareholder bringing the lawsuit must have standing to do so, which typically requires that the shareholder was a shareholder at the time of the alleged wrong and continues to be a shareholder throughout the litigation.
- Director and Officer Liability: Directors and officers may be held liable for breaches of fiduciary duty, which can include damages, restitution, and other forms of relief.
- Attorney’s Fees and Expenses: The shareholder bringing the lawsuit may be entitled to recover attorney’s fees and expenses if the lawsuit is successful, which can be a significant incentive for pursuing the litigation.
Settlement and Mediation Considerations
Settlement and mediation are often critical components of shareholder derivative lawsuits. Settlement agreements must be carefully negotiated to ensure that the terms are fair and reasonable, and that the shareholder’s interests are protected. Mediation can be an effective way to resolve disputes without the need for protracted litigation, but it requires a thorough understanding of the underlying issues and the parties’ interests.
What is the purpose of a shareholder derivative lawsuit?
+The purpose of a shareholder derivative lawsuit is to rectify wrongs committed against the corporation, such as breaches of fiduciary duty, mismanagement, or self-dealing, and to hold directors and officers accountable for their actions.
What are the key considerations in determining demand futility?
+The key considerations in determining demand futility include the independence and disinterest of the board, as well as the likelihood that the board will take action in response to a demand. If the board is not independent or disinterested, or if it is unlikely to take action, the demand may be deemed futile.
In conclusion, shareholder derivative lawsuits are complex and require careful consideration of various factors, including pre-lawsuit demand, demand futility, standing, director and officer liability, attorney’s fees and expenses, settlement, and mediation. By understanding these key considerations and navigating the complexities of shareholder derivative lawsuits, shareholders can effectively pursue litigation to rectify wrongs committed against the corporation and hold directors and officers accountable for their actions.
