What Is a Shareholder Derivative Action?
A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director.
-
Why Are Derivative Suits Filed?
Because shareholders, subject to certain limitations, are generally allowed to file a lawsuit in the event that a corporation has refused to file one on its own behalf, many derivative suits are brought against a particular officer or director of the corporation for breach of contract, self-dealing, or breach of fiduciary duty. Derivative actions may also be filed against accountants and other advisers who have somehow harmed the corporation, although there is generally no limitation on the type of claim made by a derivative suit. Any recovery goes to the corporation, not the shareholders. -
What Are the Requirements of a Derivative Lawsuit?
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.
Under federal and most states' laws, a derivative plaintiff must either first demand that the corporation's management assert the claim prior to filing suit or allege with particularity his effort to have the directors bring suit for the corporation or the reasons for not making such an effort. The demand requirement is not merely pro forma, but is a question of state substantive law. The plaintiff shareholder must make a serious effort to pursue the intra corporate remedy before bringing a derivative suit and must also make reasonable efforts to assist the corporation in bringing suit. On the other hand, traditionally, the plaintiff need not make a futile demand. Far example, a demand would traditionally be unnecessary where the directors are the wrongdoers and could not otherwise be expected to bring suit against themselves.
In federal court, once a derivative action has been filed, it may only be voluntarily dismissed or settled with approval of the court, which must inform the shareholders of such a proposed action ahead of time.
Additional resources provided by the author
Timothy L. Miles has committed his entire career to representing shareholders in complex litigation. Mr. Miles has been recognized for numerous awards for his legal abilities in his struggles to fight for shareholder rights not only among his peers but also those in the judiciary who see firsthand not only his tenacity for protecting shareholder rights, but how he always adheres to the utmost ethical standards when litigating against his adversaries and in a Court of Law. These efforts have resulted in Mr. Miles being recognized not only as an industry leader in his fight for shareholders but also in the ethical manner in which he conducts himself as a lawyer and member of the bar. These recognitions include: The AV® Preeminent™ Rating by Martindale-Hubble®, which is bestowed on fewer than 5 percent of attorneys, in Securities Law, Litigation and Class Actions (2014-2018); The AV® Preeminent™ Attorney – Judicial Edition, the Highest Possible Rating in Both Legal Ability & Ethical Standard Reflecting the confidential opinions on members of the Bar and Judiciary (2018-2017); The Top-Rated Lawyer in Litigation™ for Ethical Standards and Legal Ability by Martindale-Hubble® (Feb. 2015); Superb Rated Attorney, (10.0 out of 10), the Highest Rating Possible by Avvo; Avvo Top Rated Lawyer 2017 & 2018 (Avvo); America’s Most Honored Professionals – Top 1% (2016-2018) (American Registry).
Mr. Miles is also a member of Top 100 Civil Plaintiff Trial Lawyers: The National Trial Lawyers Association, which is by invitation only and according to the National Trial Lawyers Association, is “extended to those attorneys who exemplify superior qualifications, trial results, and leadership in their respective state based upon objective and uniformly applied criteria.” The press release by The National Trial Lawyers Association announcing Mr. Miles selection for inclusion into its Top 100 Trial Lawyers stated: “With the selection of Timothy L. Miles by The National Trial Lawyers: Top 100, Miles has shown that he exemplifies superior qualifications, leadership skills, and trial results as a trial lawyer. The selection process for this elite honor is based on a multi-phase process which includes peer nominations combined with third party research.”
Mr. Miles focuses his practice on securities fraud class actions, shareholder derivative actions, and corporate mergers and acquisitions class actions.
