The derivative lawsuit filing procedure is a complex and highly regulated process that allows shareholders to bring a lawsuit on behalf of the corporation against its directors, officers, or other parties for wrongdoing or mismanagement. This procedure is governed by state corporate laws and federal securities laws, and its specific requirements and nuances can vary significantly depending on the jurisdiction and the circumstances of the case. In general, derivative lawsuits are filed by shareholders who allege that the corporation has been harmed by the actions of its directors, officers, or other parties, and that the corporation has failed to take action to remedy the harm.
Pre-Filing Requirements
Before filing a derivative lawsuit, shareholders must typically comply with certain pre-filing requirements, which are designed to ensure that the lawsuit is not frivolous and that the corporation has been given an opportunity to address the alleged wrongdoing. These requirements may include making a demand on the corporation’s board of directors to take action to remedy the harm, and waiting a specified period of time to allow the board to respond to the demand. In some cases, shareholders may be exempt from making a demand if they can show that doing so would be futile, for example, because the board is dominated by the defendants or because the wrongdoing is so severe that it is unlikely that the board will take action to remedy it.
Demand Requirements
The demand requirement is a critical component of the derivative lawsuit filing procedure. To make a valid demand, shareholders must typically submit a written demand to the corporation’s board of directors that (1) identifies the wrongdoing or mismanagement that is the basis for the lawsuit, (2) specifies the action that the shareholder is demanding that the board take to remedy the harm, and (3) provides sufficient information to allow the board to investigate and respond to the demand. The demand must also be made in good faith and with a reasonable expectation that the board will take action to remedy the harm.
| Pre-Filing Requirement | Description |
|---|---|
| Make a demand on the board of directors | Submit a written demand to the board that identifies the wrongdoing, specifies the action demanded, and provides sufficient information to allow the board to investigate and respond |
| Wait a specified period of time | Allow the board a reasonable time to respond to the demand, which may be specified by state law or court rule |
| Show that demand is futile | Demonstrate that making a demand would be futile, for example, because the board is dominated by the defendants or because the wrongdoing is so severe that it is unlikely that the board will take action to remedy it |
Filing the Lawsuit
Once the pre-filing requirements have been met, the shareholder can file the derivative lawsuit in court. The complaint must allege the wrongdoing or mismanagement that is the basis for the lawsuit, identify the defendants who are responsible for the wrongdoing, and specify the relief that the shareholder is seeking. The complaint must also comply with the applicable rules of civil procedure, including rules governing pleading, service of process, and discovery.
Pleading Requirements
The pleading requirements for derivative lawsuits are highly specific and require shareholders to allege facts that demonstrate the wrongdoing or mismanagement, identify the specific laws or regulations that have been violated, and show how the corporation has been harmed as a result of the wrongdoing. Shareholders must also allege that they have complied with the pre-filing requirements, including making a demand on the board of directors or showing that demand is futile.
- Allege facts that demonstrate wrongdoing or mismanagement
- Identify the specific laws or regulations that have been violated
- Show how the corporation has been harmed
- Allege compliance with pre-filing requirements
What is the purpose of the demand requirement in a derivative lawsuit?
+The demand requirement is intended to give the corporation an opportunity to address the alleged wrongdoing and to allow the board of directors to take action to remedy the harm. It also helps to ensure that the lawsuit is not frivolous and that the shareholder has a legitimate claim.
What happens if the board of directors rejects the demand or fails to respond?
+If the board of directors rejects the demand or fails to respond, the shareholder can proceed with filing the derivative lawsuit. The shareholder must allege in the complaint that the demand was made and rejected, or that demand is futile, and must provide evidence to support these allegations.
In conclusion, the derivative lawsuit filing procedure is a complex and highly regulated process that requires shareholders to carefully comply with pre-filing requirements and to allege specific facts that demonstrate wrongdoing or mismanagement. Shareholders must also comply with the applicable rules of civil procedure and must be prepared to provide evidence to support their allegations. By understanding the requirements and nuances of the derivative lawsuit filing procedure, shareholders can effectively pursue their claims and protect the interests of the corporation.
