Legal Blogs

What is a Shareholder Derivative Action?

Shareholders are individuals who have an ownership stake in a corporation. The shareholders’ investments are affected by the decisions that corporate officers make. Corporate officers are expected to act in the best interests of the business at all times, and have a fiduciary obligation to do so. If a corporate officer, board member or executive does not act in the interests of the business, the company- and its shareholders- could be harmed as a result.  To protect the organization and its owners, shareholders must be able to take legal action when those in a position of power in the business fail to live up to their legal obligations.

A shareholder derivative action makes it possible for shareholders to use the legal system to make a claim against insiders. Shareholder derivative actions can raise many complicated legal issues and it is imperative to consult with a qualified Irvine business lawyer who has a strong track record representing clients in these types of cases. Brown & Charbonneau, LLP is here to provide legal assistance to clients in shareholder derivate cases. Call today to learn more.

What is a Shareholder Derivative Action?

A shareholder derivative action is a legal action that is taken by one or more shareholders (owners) of a company, who act as representative plaintiffs. The shareholder plaintiffs actually file suit on behalf of the corporation that they own a part of.  Typically, the claim is filed against board members, executive directors or others within a position of power in the organization and who may be engaging in misconduct.  Some examples of the types of behavior that can result in shareholder derivative actions being filed include:

  • Executive, manager or board member breach of fiduciary duty.
  • Corporate insiders acting in their own best interests instead of the company’s best interests.
  • Illegal, unlawful or fraudulent activity by company considers.
  • Conflicts of interest between the corporation and insiders.
  • Backdating of stock options.
  • Insider trading.
  • Wasting of corporate assets.
  • Accounting problems, including misleading or false financial statements.
  • Executive compensation improprieties.
  • Conduct on the part of insiders that triggers an investigation between the Securities and Exchange Commission (SEC) or the Department of Justice (DOJ).
  • Decisions by company insiders that put the company at risk, such as violating environmental protection laws or consumer protection laws.

When the shareholder suspects these or other problems are going on, the shareholder(s) can file a shareholder derivative action for the purposes of stopping the harmful behavior and assessing the damages. The legal action can result in removal of insiders who are harming the business; compensation to the company or shareholders; return of ill-gotten gains; or changes such as reform of corporate governance.

Shareholder derivative actions are a very important way for those who own an interest in company’s to protect themselves. These types of actions can also identify fraud and wrongdoing at large businesses, thus protecting the public from dishonest corporate actions as well. Brown & Charbonneau, LLP has extensive experience representing clients involved in shareholder derivative cases and we can put our legal experience to work for you.

Call today to schedule a consultation with a Southern California  business litigation lawyer for help. 714-505-3000