Use of Bonds & Undertakings in Shareholder Derivative Lawsuits
Business and corporate litigation attorney Gregory G. Brown talks about the use of bonds /undertakings in shareholder derivative lawsuits. Click here to watch video
Use of bonds in derivative or shareholder lawsuits. Often a shareholder’s (or owners’)
only way to prevent waste, mismanagement or self-dealing by corporate directors is to file a derivative action. A shareholder derivative action is a legal action that is taken by one or more shareholders, who act as representative plaintiffs. The shareholder plaintiffs (or members of LLC) actually file suit on behalf of the corporation seeking compensation back to the corporation from the wrong doers. Shareholder derivative actions are complex legal actions that can be costly to prosecute and defend. However, California’s Corporations Code gives defendants and companies who have been made a party to a derivative action a powerful tool to guard against meritless lawsuits. Under California Corp Code 800 (for corporations) and 17501 (for LLCs) a Defendant or company involved in a shareholder derivative action may require the Plaintiff to post a security bond in order to maintain the action.
Requirements. Upon the filing of a motion, CA Corps Code sections 800 & 17501 provide two circumstances where the posting of a security is necessary. The first is when there is no reasonable possibility that the causes of action alleged in Plaintiff’s complaint will benefit the company or its members. The second is when the non-company defendant did not participate in the transaction complained of in any capacity. This option can only be asserted by a defendant being sued in his individual capacity. If either of these requirements are met, the Court in its discretion will require the Plaintiff to post a bond or security in order to maintain its suit. This security can be up to $50,000. Now, The relief provided under these Corporations Code sections is only available in derivative actions. An action is derivative if the Plaintiff’s damages are merely incidental to the damages suffered by the company and its shareholders. An action is clearly derivative if it seeks to recover assets for the corporation, and not directly for the Plaintiff who is filing suit.
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