The derivative action is a legal proceeding that allows shareholders to bring a lawsuit on behalf of the corporation when the corporation itself has failed to take action. This type of lawsuit is typically filed when the corporation has suffered some type of harm or injury, and the shareholders believe that the corporation's directors or officers are responsible for the harm. In order to file a derivative action, shareholders must comply with certain filing requirements, which vary by jurisdiction. The following are the 11 derivative action filing requirements that shareholders should be aware of:
Pre-Filing Requirements
Before filing a derivative action, shareholders must comply with certain pre-filing requirements. These requirements are designed to ensure that the shareholder has taken all necessary steps to address the issue before resorting to litigation. The pre-filing requirements include:
1. Ownership Requirement: The shareholder must have owned shares in the corporation at the time of the alleged wrong and must continue to own shares at the time the lawsuit is filed. This requirement is designed to ensure that the shareholder has a valid claim and is not simply seeking to harass the corporation.
2. Demand Requirement: The shareholder must make a demand on the corporation’s board of directors to take action to address the alleged wrong. This demand must be in writing and must specify the alleged wrong and the action that the shareholder is demanding. The demand requirement is designed to give the corporation the opportunity to address the issue before the shareholder files a lawsuit.
Demand futility is an exception to the demand requirement. If the shareholder can show that making a demand would be futile, such as when the board of directors is self-interested or lacks independence, the demand requirement may be excused.
Demand Futility Exception
The demand futility exception is a critical component of the pre-filing requirements. To establish demand futility, the shareholder must show that the board of directors is self-interested or lacks independence. This can be established by showing that a majority of the board members have a personal interest in the outcome of the litigation or that the board members are not disinterested or independent.
3. Waiting Period: After making a demand, the shareholder must wait a certain period of time before filing a lawsuit. This waiting period is designed to give the corporation time to respond to the demand and take action to address the alleged wrong.
| State | Waiting Period |
|---|---|
| Delaware | 90 days |
| California | 120 days |
Filing Requirements
Once the pre-filing requirements have been satisfied, the shareholder can file a derivative action. The filing requirements include:
4. Complaint: The shareholder must file a complaint with the court, which sets out the allegations of wrongdoing and the relief sought. The complaint must be verified, which means that the shareholder must swear under oath that the allegations are true.
5. Jurisdiction and Venue: The shareholder must establish that the court has jurisdiction over the corporation and that the venue is proper. This means that the court must have the power to hear the case and that the case must be filed in the correct location.
6. Service of Process: The shareholder must serve the corporation with a copy of the complaint and summons. This is typically done by a process server or by certified mail.
Pleading Requirements
In addition to the filing requirements, the shareholder must also comply with certain pleading requirements. These requirements include:
7. Particularity: The complaint must be pleaded with particularity, which means that the shareholder must set out the allegations of wrongdoing in detail. This includes specifying the dates, times, and places of the alleged wrongdoing, as well as the identities of the individuals involved.
8. Good Faith: The shareholder must plead that the lawsuit is being brought in good faith, which means that the shareholder must believe that the lawsuit has merit and is not being brought for an improper purpose.
Post-Filing Requirements
After the derivative action has been filed, the shareholder must comply with certain post-filing requirements. These requirements include:
9. Discovery: The shareholder must participate in discovery, which is the process of exchanging information and evidence with the opposing party. This includes responding to interrogatories, requests for production, and requests for admission.
10. Certification: The shareholder must certify that the lawsuit is being brought in good faith and that the shareholder has conducted a reasonable investigation into the allegations of wrongdoing.
11. Settlement or Dismissal: If the lawsuit is settled or dismissed, the shareholder must comply with certain requirements, such as obtaining court approval of the settlement or dismissal.
What is the purpose of the demand requirement in a derivative action?
+The demand requirement is designed to give the corporation the opportunity to address the alleged wrong before the shareholder files a lawsuit. It also allows the corporation to take corrective action and avoid the costs and burdens of litigation.
What is the difference between a derivative action and a direct action?
+A derivative action is a lawsuit brought by a shareholder on behalf of the corporation, whereas a direct action is a lawsuit brought by a shareholder in their own name. In a derivative action, the shareholder is seeking to recover damages on behalf of the corporation, whereas in a direct action, the shareholder is seeking to recover damages for their own personal losses.
