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Derivative lawsuits by shareholders

On Behalf of | Sep 27, 2023 | Business Litigation

Shareholders of corporations are essentially owners of the company. While the officers, directors and board members are responsible for the company’s day-to-day operations, the shareholders are the real decision-makers. If shareholders believe one or more of the directors or managers of a New York corporation are taking actions that seem to be harming the company, they can attempt to bring suit against those at fault. This is called shareholder derivative action.

Why would a derivative action be filed?

It is the primary responsibility of the directors of a corporation to bring suit against key personnel who have committed wrongdoing against the company. When the directors refuse to file suit, shareholders have the right to file a suit. Business litigation suits such as these are typically filed when a management official has not honored requirements of their contract or has been financially irresponsible in some way.

What is required to file a derivative suit?

A derivative suit can only be brought by the shareholders, and in most cases, the shareholders may be required to own stock in the company to participate in the suit. Shareholders may be asked to prove they requested the company’s directors to file suit, and that the directors refused to do so. Typically, a detailed account of the request to sue and the response by the directors will need to be submitted.

Who is awarded damages in a derivative lawsuit?

With this type of business dispute, damages are awarded directly to the corporation if violations have been proven. Even though the shareholders filed the lawsuit, they cannot directly receive monetary compensation. However, since they are technically company owners, they are indirectly compensated when the business gets a settlement.

If shareholders seek to dismiss a suit, the court would most likely have to approve their request. Depending on the nature of the suit, derivative actions can bring upheaval to a company and should not be taken lightly.