Class-action vs. Derivative Shareholder Lawsuits
When shareholders suffer damages, they can bring a class-action suit, in which multiple plaintiffs belonging to a defined "class" join in a suit against defendants seeking compensation for similar damages. They can also bring a derivative lawsuit, in which shareholders sue company management.
Purposes of Class-action and Shareholder Derivative LawsuitsThe main purpose of class-action lawsuits is to allow a group of individuals who have shared a common damage to pursue claims for damages, even when their individual claims would be redundant or insignificant. Class-action lawsuits also serve to eliminate redundancy in the judicial system and to bring efficiency to litigation. The main purpose of shareholder derivative lawsuits is to allow shareholders to pursue claims against the corporation in which they hold shares. While class-action lawsuits allow a specific group of shareholders to sue the corporation -- for example, shareholders who purchased stock in a particular time period -- a shareholder derivative lawsuit encompasses the interests of all the shareholders. Shareholders frequently bring derivative lawsuits against their corporation as a means of settling disputes between shareholders and corporate management, especially in matters concerning corporate governance and allegations of mismanagement.
Requirements of Class-action LawsuitsFederal Rule of Civil Procedure 23(a) includes four requirements for class-action lawsuits that a plaintiff must plead and prove. The fist requirement is that the number of parties, either plaintiffs, defendants or both, must be so numerous it would be impractical for each plaintiff to pursue an individual claim. The second requirement is that a common question of law or fact must exist to make it more efficient to hear all the claims at once. A third requirement is that each case must have a common issue, such as product liability. The last requirement is that the class representatives must represent the entire class, rather than individual plaintiffs.
Additionally, at least one of the requirements in Rule 23(b) must be satisfied, namely:
(a) separate adjudications will create a risk of decisions that are inconsistent with or
dispositive of other class members* claims, (b) declaratory or injunctive relief is
appropriate based on the defendant*s acts with respect to the class generally, or (c)
common questions predominate and a class action is superior to individual actions.
Requirements of a Derivative LawsuitA shareholder derivative action is filed pursuant to state law. If the suit is filed in state court, the substantive law and procedural rules of that state usually apply. Filing in federal court means that state substantive law and the Federal Rules of Civil Procedure, including Fed. R. Civ. P. 23.1, which specifically addresses derivative actions, are likely in force.
Only shareholders of a corporation can bring a derivative suit. Some states allow a person to bring a derivative suit as long as he or she held the company*s stock at the time of the incident that gave rise to the suit. Others require that the shareholder owns stock in the company at the time of the inciting action and continuously throughout the resolution of the lawsuit. This is referred to as the *continuous ownership requirement.* If the shareholder*s interest in the company was lost, or devolved, because of the inciting action, many states allow the suit to be filed.
State laws and federal procedures almost universally require that the shareholder show that he or she attempted to bring the problem to the attention of company's directors, but they chose not to pursue the action. Most often, procedural rules require that the initial pleading state with particularity the efforts made in this regard. In some cases when the action alleges misconduct on the part of board members, this requirement may be relaxed, since it is not expected that people would voluntarily sue themselves. In other words, such a demand would have been futile.