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The Basics of Derivative Shareholder Claims: Protecting the Rights of the Corporation and its Shareholders

by | Sep 21, 2020 | Firm News |

Protecting your rights as a shareholder of a corporation, or member of a limited liability company, is not as easy as filing a lawsuit in your name.  Often, claims of mismanagement or waste against individuals controlling a company are “derivative,” meaning that they rest with the company or the whole body of shareholders rather than one shareholder, individually.  This post discusses derivative actions, as opposed to direct shareholder actions, which will be covered in the next post.

What are Derivative Actions? If your claims might be common among all shareholders of the corporation, or a class of shareholders of the corporation, your claims may be derivative.  This means that the actual claim rests with the corporation rather than an individual shareholder. Broad allegations of mismanagement, waste, or fraud typically fall into this kind of claim.  Derivative claims must be brought in the name of the corporation, and often require that certain notices be given to the board of directors or managers of the corporation/company prior to filing suit.  The notices are intended to give the individuals in control of the corporation to resolve the dispute timely on behalf of the company.

What damages are in play?  Because the underlying claims typically involve fraud or mismanagement of the entire company, damages in a derivative action typically flow back to the company. If the damages relate to out-of-pocket costs on behalf of the shareholders, then any damages recovered will be divided pro rata among all shareholders affected. Thus, while the total amount at issue may be considerable, individual shareholders may not receive a significant windfall. State’s typically provide that attorney fees are recoverable if a derivative action is successful, meaning that the individual shareholder or shareholders who retain attorneys may ultimately be reimbursed for the costs they’ve spent if they are successful on the merits of their claims.

How do I know whether my Claims are Derivative? A quick way to begin the analysis is asking “are other shareholders equally affected?”  If the answer is yes, then  there is a likelihood that your claims are derivative. Contacting an attorney to discuss the specifics of your claims is often necessary to make a final determination.  For a free consultation, call Devin at 248-782-7755 or complete our online contact form.