A shareholder lawsuit, known as a “derivative action” is a lawsuit brought by a corporation shareholder against the directors, management or other shareholders of the corporation. This is frequently for a failure to properly manage the corporation. Often, the lawsuit is brought because of some sort of fraud or dishonesty within the corporation.
The suing shareholder acts on behalf of the corporation and not themselves. This is typically because the directors or management fail to exercise their authority for the benefit of the company and its shareholders. In addition to incompetence a suit can be brought because of mismanagement, self-dealing, fraud or dishonesty which is ignored or even caused by officers or the Board of Directors of a corporation.
Frequently, shareholder litigation begins with a request to view records. All shareholders have right to inspect the records of a corporation. Generally, the main reason that a shareholder might want to do so is to ascertain the values of the shares. It is also permissible to get a list of all other shareholders. Typically, this is done in order to make it possible to communicate with each other so that efforts can be coordinated which will allow, at least in theory, the maximum growth and benefit to the company.
Whether or not to file a derivative action can be a complicated question, even for an attorney. Sometimes filing a lawsuit on behalf of the corporation is the best decision and sometimes filing a lawsuit on behalf of one’s self is a better option. There are a large number of factors and considerations to take into account. Frequently, all someone knows is that they are being cheated or their money is being mismanaged.