When you believe company leaders have engaged in wrongdoing, you may feel that no one inside the business will address it. That concern often grows when the same directors or officers control whether the corporation takes action.
You may bring a shareholder derivative lawsuit when those leaders fail or refuse to pursue a claim that belongs to the corporation. In this type of case, you act on the corporation’s behalf rather than seek recovery for a separate loss you suffered as a shareholder.
How does the lawsuit protect the corporation?
A derivative lawsuit treats the corporation as the injured party. You act for the corporation when its directors or officers fail to pursue a valid claim.
The case may involve claims that company leaders misused corporate funds or breached duties they owed to the corporation. If the case succeeds, the corporation generally receives the recovery. A court might order a wrongdoer to repay or return an improper gain.
A derivative lawsuit is different from a direct shareholder claim. You bring a direct claim when the conduct harms a right that belongs to you, apart from any harm to the corporation. The nature of the wrongdoing usually determines which type of claim fits the dispute.
What must you do before filing?
For a California corporation, you generally must describe in the complaint the steps you took to ask the board to act. If you made no demand, you must explain why. You must also state that you gave the corporation or its board written notice of the key facts or a copy of the proposed complaint.
You also must address when you acquired your shares. California law usually requires you to have owned your shares when the disputed act took place, though limited exceptions apply. A court could dismiss a complaint that does not state these facts with enough detail.
Prepare to protect the corporation
A possible breach of duty may leave you concerned about your investment and the company’s future. Understanding whether the loss affected you or the corporation, then gathering the right facts and records, could help you handle the process with greater care and protect the corporation’s interests.