This article answers common questions asked by people about shareholder derivative lawsuits.
What is a shareholder derivative lawsuit?
A shareholder derivative lawsuit is a legal action brought by a shareholder on behalf of a company to remedy a wrong or to protect the company’s interests. The shareholder brings the lawsuit in the name of the company, rather than in their own name, and the company is the party that ultimately recovers any damages or other relief.
Who can bring a shareholder derivative lawsuit?
A shareholder derivative lawsuit can be brought by a shareholder of the company who has standing to bring the action. Standing refers to the legal right to bring a lawsuit, and it is typically based on the shareholder’s status as a shareholder of the company and the nature of the claim being brought.
What is the purpose of a shareholder derivative lawsuit?
The purpose of a shareholder derivative lawsuit is to remedy a wrong or to protect the interests of the company. This may include seeking damages for harm caused to the company, seeking to enjoin (prevent) future harm to the company, or seeking to hold directors or officers accountable for their actions.
What types of actions can be the subject of a shareholder derivative lawsuit?
A shareholder derivative lawsuit can be brought to address a wide range of actions that may harm the company or its shareholders. This may include breaches of fiduciary duty, self-dealing, corporate waste, or other misconduct by directors or officers of the company.
How do shareholder derivative lawsuits differ from class action lawsuits?
In a class action lawsuit, a group of people with a common interest in a legal claim bring a lawsuit on behalf of themselves and other members of the class. In a shareholder derivative lawsuit, a single shareholder brings a lawsuit on behalf of the company to remedy a wrong or protect the company’s interests. Class action lawsuits are typically brought to seek damages or other relief for harm suffered by the plaintiffs, whereas shareholder derivative lawsuits are brought to seek damages or other relief for harm suffered by the company.
What are the steps in a shareholder derivative lawsuit?
The steps in a shareholder derivative lawsuit may vary depending on the specific facts and circumstances of the case, as well as the laws of the jurisdiction in which the lawsuit is brought. However, typical steps in a shareholder derivative lawsuit include:
- Filing a complaint: The shareholder files a complaint with the court outlining the basis for the lawsuit and the relief sought.
- Service of process: The complaint is served on the defendants, typically the directors or officers of the company.
- Answer: The defendants file an answer to the complaint, denying or admitting the allegations and raising any defenses.
- Discovery: Both sides engage in a process of discovery, in which they exchange information and documents related to the case.
- Motion practice: Either side may file motions with the court seeking to have the case dismissed or to have certain issues resolved before trial.
- Trial: If the case is not resolved through motion practice or settlement, it may proceed to trial, where both sides present evidence and arguments to the court.
- Judgment: The court issues a judgment in favor of one side or the other, granting or denying the relief sought.
How is standing determined in a shareholder derivative lawsuit?
Standing in a shareholder derivative lawsuit is determined by the court based on the shareholder’s status as a shareholder of the company and the nature of the claim being brought. The shareholder must show that they have suffered a personal injury as a result of the conduct at issue and that their injury is different from that of the other shareholders.
What are the potential outcomes of a shareholder derivative lawsuit?
The potential outcomes of a shareholder derivative lawsuit may include damages or other monetary relief for the company, an injunction prohibiting certain conduct, or other relief as determined by the court. In some cases, the lawsuit may result in a settlement, in which the defendants agree to pay a sum of money or take other action in exchange for the shareholder dismissing the lawsuit.
Can a shareholder derivative lawsuit result in a settlement?
Yes, a shareholder derivative lawsuit may result in a settlement, in which the defendants agree to pay a sum of money or take other action in exchange for the shareholder dismissing the lawsuit. Settlements may be reached at any point in the litigation process, including before the lawsuit is filed, during the discovery phase, or prior to trial.
How are attorney’s fees and costs handled in a shareholder derivative lawsuit?
In a shareholder derivative lawsuit, the company is typically responsible for paying the attorney’s fees and costs incurred in pursuing the lawsuit. If the company is successful in obtaining a recovery, the attorney’s fees and costs may be paid out of the recovery. If the company is not successful, the attorney’s fees and costs may be paid by the company or may be waived by the attorneys.
Can a shareholder derivative lawsuit be dismissed?
Yes, a shareholder derivative lawsuit can be dismissed by the court for a variety of reasons, including if the shareholder lacks standing to bring the action, if the allegations in the complaint are insufficient to state a claim, or if the court determines that the lawsuit is not in the best interests of the company.
What is the statute of limitations for a shareholder derivative lawsuit?
The statute of limitations for a shareholder derivative lawsuit is the time period within which the lawsuit must be filed. The specific statute of limitations that applies to a shareholder derivative lawsuit may vary depending on the laws of the jurisdiction in which the lawsuit is brought and the nature of the claim being brought. It is important to consult with an attorney to determine the applicable statute of limitations.
How long does a shareholder derivative lawsuit take to resolve?
The length of time it takes for a shareholder derivative lawsuit to resolve may vary depending on the complexity of the case, the availability of evidence and witnesses, and the willingness of the parties to settle the case. In some cases, shareholder derivative lawsuits may be resolved quickly through settlement, while in other cases, they may take several years to resolve through trial and appeals.
Can a shareholder derivative lawsuit be appealed?
Yes, a shareholder derivative lawsuit can be appealed if either side is dissatisfied with the outcome of the case. The party appealing the decision must file a notice of appeal with the court and follow the procedures for appealing a case. The appeal is typically heard by a higher court, which reviews the record of the case to determine whether any errors were made by the lower court.
What are some defenses that can be raised in a shareholder derivative lawsuit?
Defendants in a shareholder derivative lawsuit may raise a variety of defenses to the claims being brought against them. Some common defenses include:
- Lack of standing: The defendants may argue that the shareholder lacks standing to bring the lawsuit because they have not suffered a personal injury as a result of the conduct at issue.
- Business judgment rule: The defendants may argue that their actions were taken in good faith and in the best interests of the company, and therefore should be protected by the business judgment rule.
- Statute of limitations: The defendants may argue that the lawsuit is barred by the statute of limitations, which is the time period within which the lawsuit must be filed.
- Lack of causation: The defendants may argue that the actions at issue did not cause the harm alleged by the shareholder.
- Lack of damages: The defendants may argue that the company has not suffered any damages as a result of the conduct at issue.
Can a shareholder derivative lawsuit be consolidated with other lawsuits?
Yes, a shareholder derivative lawsuit may be consolidated with other lawsuits if the lawsuits involve common issues of fact or law and it would be more efficient to hear the cases together. Consolidation of lawsuits may be ordered by the court on its own motion or upon the request of one of the parties.
How can a shareholder protect their rights in a derivative lawsuit?
A shareholder can protect their rights in a derivative lawsuit by:
- Consulting with an attorney: An attorney can help the shareholder understand their rights and options, and can provide guidance on the best course of action to pursue.
- Ensuring timely filing: The shareholder should ensure that the lawsuit is filed within the applicable statute of limitations, which is the time period within which the lawsuit must be filed.
- Participating in the litigation process: The shareholder should stay informed about the progress of the lawsuit and participate in any proceedings as necessary.
- Seeking relief: The shareholder should seek relief that is in the best interests of the company and that adequately remedies any wrongs or harms suffered by the company.
Can a shareholder derivative lawsuit be brought against a private company?
Yes, a shareholder derivative lawsuit can be brought against a private company. However, the specific procedures and requirements for bringing a shareholder derivative lawsuit against a private company may vary depending on the laws of the jurisdiction in which the lawsuit is brought. It is important to consult with an attorney to understand the applicable rules and procedures.
Can a shareholder derivative lawsuit be brought against directors or officers of a company?
Yes, a shareholder derivative lawsuit can be brought against directors or officers of a company for actions taken in their capacity as directors or officers that are alleged to have harmed the company or its shareholders. The shareholder may seek damages or other relief from the directors or officers for their actions.
What are some potential risks and benefits of bringing a shareholder derivative lawsuit?
Some potential risks of bringing a shareholder derivative lawsuit include:
- The cost and time commitment of litigation: Litigation can be expensive and time-consuming, and there is no guarantee of success.
- The possibility of an adverse outcome: The shareholder may not prevail in the lawsuit and may end up with no recovery or even be ordered to pay the defendants’ attorney’s fees and costs.
- Damage to relationships: Bringing a lawsuit against the directors or officers of the company may damage the shareholder’s relationships with these individuals and with the company as a whole.
Some potential benefits of bringing a shareholder derivative lawsuit include:
- Remedying a wrong: The shareholder may be able to hold the directors or officers accountable for their actions and obtain damages or other relief for the company.
- Protecting the company’s interests: The shareholder may be able to protect the company’s interests and prevent future harm to the company or its shareholders.
- Sending a message: A successful shareholder derivative lawsuit may send a message to other directors and officers of the company that they will be held accountable for their actions.