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The mechanics of a shareholder derivative lawsuit

On Behalf of | Jan 7, 2021 | Business & Commercial Litigation

Shareholder derivative lawsuits are a powerful tool to ensure that officers of a company are acting in the best interests of the shareholders. Many Massachusetts natives are shareholders of numerous companies, and by virtue of this status, they can initiate shareholder derivative litigation against a company or its officers.

What is a Shareholder Derivative Lawsuit?

The main difference between a derivative lawsuit and a class action or direct suit is that in the former, the shareholder is not just suing for their own benefit. Rather, the plaintiff is litigating for the benefit of all other shareholders who may be impacted by the wrongful acts of a business or its officers.

Common Types of Derivative Actions

Derivative actions are often based on breaches of fiduciary duties of company officials, which may involve self-dealing, conflicts of interest, and other matters. In addition, derivative actions also commonly involve the improper transfer of equity in a company that may dilute the voting power of shareholders. Moreover, derivative actions may also involve entitlement to dividends or other funds.

Procedures for Derivative Actions

Before initiating shareholder derivative litigation, the shareholder must typically inform management of the issues that will be subject to the lawsuit unless it would be futile to provide such notice. After a lawsuit is filed, the plaintiff must also provide notice to other shareholders in order to give them an opportunity to be involved in the litigation.

Available Damages

If a shareholder wins a shareholder derivative suit they will not be able to recover individually, but the shareholders as a group will receive the relief sought in the lawsuit. Moreover, shareholders will ordinarily be reimbursed for their legal expenses from a corporation after litigation has been resolved. As such, plaintiffs with meritorious cases might consider pursuing shareholder derivative lawsuits. An attorney with experience in business & commercial litigation may be able to provide guidance and assistance.