Corporate Shareholder Lawsuits: Direct Actions

The two distinct types of lawsuits that a shareholder can bring are the direct action and derivative ones. The former is either filed on the shareholder’s own behalf or to help a class of shareholders to which the party filing the lawsuit belongs. This article will chiefly address the general aspects of the direct action lawsuit.

A shareholder brings a direct action because s/he believes that the corporation has violated some type of duty owed to the shareholder. However, this same individual can also file a class action lawsuit as a representative of an entire class of shareholders whose rights have allegedly been abridged or violated.

The types of corporate actions that could lead to such lawsuits may include denying certain shareholders specific preemptive rights regarding new stock offerings or allegedly allowing a corporate officer or “insider” to buy up stocks from some shareholders without disclosing all critical information about the purchase.

Why Courts Must Carefully Determine Which of These Two Suits Has Been Filed

Courts have to make this distinction carefully since derivative lawsuits invoke special statutes requiring security for expenses. The main inquiry is whether the key injury was suffered by the corporation or the shareholder who was owed some type of duty.

Sometimes, when it's hard for a court to distinguish which type of suit is being brought, it will hold that it is a direct one if the shareholder is only seeking injunctive relief.

Common Types of Fact Situations Leading to Direct Actions

When the direct or immediate injury has been suffered by the shareholder, the direct action will normally be allowed. For example, the shareholder might file a lawsuit after a corporate reorganization has allegedly diluted the shareholder’s voting powers of influence. The same type of case might also be filed as a class action.                                                                               

Certain types of “special duty” cases are often declared to be direct actions, even when the corporation was actually inflicted with the immediate injury. This occurs when the court rules that a special duty was owed to the shareholder- plaintiff. An example of this type of lawsuit can occur when a plaintiff -shareholder claims that the corporation's assets were wrongfully depleted by one or more corporate officers or the board of directors. On some occasions, a court will allow the same injurious activity to give rise to both a direct action lawsuit and a derivative case.

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