Shareholder Derivative Litigation
Contact Nick directlyShareholder derivative litigation happens when a corporation has a legal right against someone else, but the company’s directors choose not to exercise it so a shareholder, who owns a piece of the company, initiates the lawsuit on the corporation’s behalf. Also known as a shareholder derivative action, these claims are a type of shareholder dispute in corporate law and business litigation. They are a common tool for both for activist shareholders as well as for shareholders who want to get rid of corporate officers who are committing financial misconduct. They are heavily regulated by the legal system to prevent their abuse.
The securities litigation and business attorneys at the national law firm Oberheiden P.C. have a long history of successfully advocating for shareholder equity rights, as well as representing the corporation and its officers against individual actions taken by shareholders that could be harmful to the company.
Corporate structure in America is fairly simple and straightforward. Shareholders own pieces of the company and experience losses or gains when the company’s stock price decreases or increases. However, those shareholders do not make decisions on behalf of the company, other than to vote for who will sit on the board of directors. That board of directors is then in charge of appointing corporate officers, most notably the chief executive officer (CEO), who then manage the day-to-day aspects of running the company.
In today’s corporate attitude, those officers – and the corporation that they run – only have one legal duty: To maximize value for the shareholders. In certain cases, that duty can be fulfilled by taking legal action against a party that has harmed the value of the corporation.
Sometimes, though, the corporate officers elect to not take that legal action.
When that happens, shareholders may have a valid argument that the choice to not take legal action amounts to a breach of the officers’ legal duties to maximize shareholder value. This gives them standing to file a shareholder derivative lawsuit on behalf of the company against the party that harmed it – the lawsuit that the corporate officers chose not to pursue.
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The legal actions that corporate officers choose not to pursue can be for a variety of issues. Most of the time, though, the corporate officers chose not to pursue the legal action because it would be filed against themselves for something like:
- Breach of contract
- Business fraud
- Embezzlement
- Accounting fraud
- Stock fraud
- Omissions or misrepresentations
- Conflict of interest and breach of fiduciary duty
Evidence of these issues can be uncovered through a corporate investigation or a whistleblower claim against the company. In some cases, they manifest in a criminal case. In others, though, the suspected corporate officers are not charged.
Just because they are not facing criminal charges, though, does not mean that they have not harmed the corporation and, through the corporation, its shareholders. That financial harm is what entitles shareholders to pursue a derivative litigation.
Elements of a Derivative Claim
Shareholder derivative litigation is covered by state corporate law. Though it frequently gets resolved in federal court – because the parties are from different states and there is a lot of money involved – the federal court will still apply the applicable state law.
Different states have slightly different elements and requirements for derivative litigation claims to succeed. However, the general themes are largely the same. While they may end up limiting who can file the derivative claim and end with other claims getting dismissed on procedural grounds, these requirements are meant to ensure that adequate efforts were made to handle the shareholder dispute within the corporation before taking the claim to court.
First, state corporate law requires that the shareholder filing the derivative suit must have owned shares at the time that the allegations occurred: If the derivative claim is over embezzlement that allegedly happened in January, 2020, then the shareholder filing the claim must have owned their shares at that time. Many states also require continuous ownership, mandating that the shareholder behind the litigation hold on to their shares until the lawsuit’s resolution.
Second, shareholders in nearly all states have to prove that they took reasonable efforts to get the corporate officers or board members to take action. What efforts are “reasonable” may vary, and may be relaxed if the alleged misconduct was being committed by the very same people who declined to take action. Generally, though, shareholders must send a demand letter ordering the corporation to take action at least 90 days before initiating the derivative claim, unless:
- The corporation would suffer irreparable harm, or
- The corporation rejects the demand before the 90 days elapse.
Finally, in order to pursue a shareholder derivative claim, the shareholder must adequately represent the interests of other shareholders at the company.
Damages Recoverable
Importantly, any damages that the shareholder derivative claim recovers would go into the corporation’s coffers, not the individual shareholder’s pockets. After all, the entire underlying claim of the lawsuit is that corporate inaction was harming the company, and that harm violated the corporation’s duty to the shareholder. If the individual shareholder recovered all the damages, they would get a windfall and other shareholders would be left with nothing.
The shareholder that pursued the claim, however, can seek to have his or her attorneys’ fees and court costs covered from the proceeds of the litigation.
Over the course of many years in practice, our business litigation attorneys have represented all of the different sides of shareholder derivative lawsuits at multiple times in the past. That varied experience gives us a leg up on other business litigation law firms, as we are aware of the interests that are at play on the other sides of the case. This allows us to provide more informed guidance to our current clients, targeting weak points in the opposition’s case and taking advantage of them for our clients’ benefit.
What Sets Oberheiden P.C. Apart from Other Business Litigation Law Firms?
The breadth of our experience in this complex area of business litigation law is one of the things that our clients say puts us above the competition. However, we like to tout our unique law firm structure, as well.
Unlike other law firms, Oberheiden P.C. only employs senior-level attorneys and investigators. This means that you can rest assured that you are getting experienced legal guidance and representation. Less obviously, it also means that the work for your case is not going to get delegated to junior associates and paralegals, as it would at other business litigation firms. We cannot delegate it to junior associated because we do not have any.
Do These Cases Normally Settle?
The vast majority of all cases, not just shareholder derivative claims, settle outside of the courtroom. Shareholder derivative cases, however, depend on the interests of the parties and the allegations being made. Activist shareholders may insist on getting their day in court in order to prove their point and will refuse to settle for anything less than an exorbitant amount. Corporate officers being accused of misconduct that they know they did not commit may also want to go to trial in order to clear their name and protect their professional reputation so they can continue on in their chosen career.
Therefore, saying what these cases “normally” do once they have been filed would be misleading. It depends on the interests and intentions of the parties involved.
Shareholder derivative claims are distinct from direct shareholder actions in that derivative claims are filed by shareholders on behalf of the company for harm suffered by the company, while direct actions are filed by shareholders on their own behalf, against officers of the company who have harmed the shareholder. Direct shareholder actions argue that the officer violated his or her duty to the individual shareholder, causing that shareholder to lose money or corporate rights.
Direct shareholder actions are generally confined to closely held corporations with a small number of shareholders and where the balance of power between majority and minority shareholders is unequal.
What is a “National Law Firm”?
Oberheiden P.C. has its main law offices in Houston and Dallas, Texas, but also has satellite offices across the country. Regardless of where your corporate issue is taking place, chances are high that we have local counsel nearby to guide you through it in the way that best protects your interests.
Statements claiming that Oberheiden P.C. is the best at shareholder lawsuits would mean far more when they came from prior clients who benefited from our legal advocacy and guidance than if they came from us. Read the testimonials of our prior clients here and decide for yourself if Oberheiden P.C. is the best shareholder derivative litigation team for you.
The Business Litigation Lawyers at Oberheiden P.C.
Shareholder derivative litigation is a serious legal affair that can upend a corporation. However, if done properly and the allegations are strong, it can also ouster members of corporate leadership that are holding the company back or that are using the corporation to unjustly enrich themselves.
The business litigation lawyers at the national law firm Oberheiden P.C. guide corporations, corporate officers, and shareholders through this unique predicament. With our savvy strategizing and strong advocacy, our clients have done all that they can to protect their rights, pursue their interests, and preserve the health of the corporation that they own or work for.
Call them at (866) 680-1745 or contact them online.