Define: Shareholders Derivative Action

A shareholders derivative action is a lawsuit filed by a shareholder on behalf of a corporation against its directors, officers, or other third parties for alleged wrongdoing or breach of fiduciary duty.

Typically, shareholders who own a certain percentage of the corporation’s stock can bring a derivative action. The specific ownership threshold may vary depending on the jurisdiction and the corporation’s bylaws.

Shareholders can bring claims for various types of misconduct, such as fraud, mismanagement, self-dealing, insider trading, or other breaches of fiduciary duty by the corporation’s directors or officers.

The purpose of a derivative action is to hold the corporation’s directors and officers accountable for their actions and to seek remedies on behalf of the corporation, such as monetary damages or changes in corporate governance.

A shareholder typically needs to make a demand on the corporation’s board of directors to take action against the alleged wrongdoers. If the board fails to act or rejects the demand, the shareholder can then file a lawsuit on behalf of the corporation.

If the derivative action is successful, any financial compensation obtained will generally go to the corporation rather than the individual shareholder who initiated the lawsuit. However, the shareholder may be entitled to reimbursement of legal expenses.

In general, shareholders are not personally liable for the corporation’s legal costs in a derivative action unless they have engaged in fraudulent or malicious conduct.

Yes, a derivative action can be settled out of court if the parties involved reach an agreement. However, the settlement must be approved by the court to ensure it is fair and in the best interest of the corporation.

Yes, a derivative action can be dismissed by the court if it determines that the shareholder lacks standing, the claims lack merit, or if there are procedural deficiencies in the lawsuit.

Yes, shareholders of closely held corporations can bring derivative actions, but the rules and requirements may differ from those applicable to publicly traded corporations. It is advisable to consult with an attorney familiar with the specific laws governing closely held corporations.