A derivative action is a lawsuit filed by a shareholder on behalf of the company against a third party. Usually the third party is a director or officer of the company. Common allegations presented in a shareholder derivative complaint include:
- Fraud
- Conflict of interest
- Breach of fiduciary duty
- Self-dealing
- Inaccurate accounting
- Waste of corporate assets
- Misleading, false, or inflated financial statements
- Decisions that open the company to harm, violates consumer protection or other laws
- Inflation of executive compensation
Standing
To have legal capacity to bring a derivative action, plaintiff must have been a shareholder when the offenses occurred or received the shares through a legal stock transfer from someone who held them at that time.
Written Demand
The plaintiff must make written demand to the company’s board of directors to correct the alleged offenses. The plaintiff cannot file a derivative suit until 90 days have passed after the written demand was made, unless:
- the plaintiff received written notice that demand has been rejected by the board
- waiting the full 90-day period would cause irreparable harm to the company
Investigation
If the company begins an investigation into the demand, the court may put the lawsuit on hold until the outcome of the investigation. The court may dismiss the lawsuit if, after the conclusion of a reasonable investigation, a disinterested and independent majority of the board, a committee thereof or other appointed individuals have determined in good faith that pursuit of the complaint would not be in the best interests of the company.
Termination of the Suit & Attorney’s Fees
The court’s approval is required before the suit may be dismissed or settled, and notice to affected shareholders may be required. A defendant may recover reasonable attorney’s fees if the court finds that the suit was brought without reasonable cause. A successful plaintiff may recover reasonable attorney’s fees from a judgment or settlement. The remainder of the recovery belongs to the company.
Consult the Tampa Derivative Action Attorneys at Lieser Skaff Alexander
Shareholders expect senior management to exercise sound business judgment. Senior management expects to have the ability to respond properly to shareholder demands. Our thorough understanding of corporate practices and law allows us to research, prepare and assert shareholder demands when appropriate and investigate and respond thoroughly to shareholder demands. Our negotiation skills and dispute resolution experience allows us to facilitate beneficial compromises and help the parties return to the business of running a company.
