Corporate Shareholder Lawsuits: Derivative Actions

 Although there are two categories of lawsuits often brought by some shareholders, media reports seem to discuss “derivative” cases most often. These are filed on behalf of the corporation, claiming it has failed to bring suit on its own behalf – thereby affecting all shareholders.  In contrast, a “direct action” case involves a shareholder filing to redress alleged wrongs committed against his/her own interests.

Types of Wrongs Common to Derivative Suits

            These are often related to a corporation's failure to sue after one or more of the following acts, omissions, or failures occur.

  • The corporation fails to aggressively seek payment for large amounts owed to it;

  • Corporate officers (or others) are not required to repay the company for any money or goods stolen -- or invested without the required approval;

  • No one has pursued legal actions against outside wrongdoers who have carried out widespread looting of corporate inventory or other property;

  • The corporation has failed to comply with court orders obtained by the government – thereby threatening the ongoing existence of the corporation.

On occasion, since derivative cases often involve “gray” legal areas tied to equity and basic fairness, courts will sometimes recognize a lawsuit as being both a “direct action” and a “derivative” suit if justice will be better served by so doing.

Basic Requirements for Filing a Shareholder Derivative Lawsuit

            Plaintiffs must be prepared to prove that they have first exhausted all internal avenues available for forcing the corporation to act as required by external laws, its own articles of incorporation and bylaws – or generally understood fair dealings.

            One of the chief requirements is that a potential plaintiff- shareholder must first advise the board of directors of his/her concerns and complaints. Of course, when a plaintiff can somehow document that such activity would almost certainly proved useless, a court may not require it. However, courts will normally require some effort to allow corporations to first respond internally to charges brought – otherwise, court dockets might be overwhelmed by spurious shareholder actions.

A General Doctrine of Fairness Is Invoked by Courts

            In some instances, when a corporation's board of directors or chief officers are able to fully document the “good faith” reasons why they acted (or failed to act) in a certain way -- a derivative lawsuit may not be allowed. Honestly exercised, sound business judgment can prevent overly aggressive shareholders from trying to force the corporation to act as the shareholders are trying to dictate.

To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (980) 246-2656.