Shareholder derivative litigation seeks to enforce and further the rights of shareholders by holding boards of directors and executive officers accountable for harm caused to the company. We represent proactive investors, of all sizes, who seek revisions and implementation of corporate governance to maximize shareholder value. Other relief may include the removal of officers or directors, monetary payments, and the formation of special committees.
For example, if officers or directors were misreporting company income to disguise insider loans or financial packages, a derivative action may compel the formation of an Audit Committee. Audit Committees oversee the organization’s management, internal and external auditors to protect and preserve the shareholders’ equity and interests. This could boost company profits and share price. Other corporate committees include Disclosure Committees, Compensation Committees, Ethics Committees, and Public Relations Committees, among others.
Another example would be if officers or directors of a pharmaceutical company were misreporting the results of trial drug testing. A derivative action may compel the formation of a Disclosure Committee to prevent incorrect press releases and stop the company’s stock from spiking to artificial highs.
A shareholder derivative lawsuit is a case brought by a shareholder on behalf of a corporation. Generally, these cases can only occur when the corporation has a valid case but refused to pursue it. This can happen when a corporate director or officer or someone close to the company is the defendant in the lawsuit. If the suit succeeds and damages are awarded, they go to the corporation. This can lead to a higher share price.
To bring a shareholder derivative cause of action, the shareholder must have owned shares at the time of the defendant’s wrongdoing. Such a case may be filed by a shareholder on behalf of the corporation against an officer or director who has a fiduciary duty to maximize shareholder value for the benefit of the corporation and the shareholders. Shareholder derivative cases are filed with the purposes of:
Pre-litigation demand requires a plaintiff shareholder to first make a demand on the corporation to pursue a remedy within the corporation and to assist the corporation in bringing a cause of action. Alternatively, a plaintiff may forego demand when it is futile because a board lacks independence or there is an interested director. Demand is often futile and considered unnecessary when the directors are culpable of wrongdoing, in which case they cannot be expected to bring a lawsuit against themselves.
Depending on the circumstances, the board of directors may agree to the shareholder’s demand and proceed with litigation against the corporation. If that occurs, the corporation will file the lawsuit against its own board and executive officers.
Shareholder derivative cases are based on corporate wrongdoing usually with a plunge in stock price. A derivative case will impose new corporate reforms to stop the wrongdoing from happening again and preserve or restore share value.
If the lawsuit is successful, the shareholder may be entitled to compensation. This compensation is court ordered and can be significant. Your best course of action is to have an experienced securities litigation attorney by your side from the beginning.
Our attorneys at Moore Kuehn have experience in all types of securities litigation. Call us as soon as possible if you are considering shareholder derivative litigation.