Derivative action is a legal proceeding in which a corporation’s shareholders file a lawsuit on behalf of the company; it is filed against other shareholders, third parties or the corporation itself when a management team is not representing the interests of the corporation in an appropriate manner. This process is used to protect the corporation’s interests, typically in the face of an alleged breach of fiduciary duty.
The Basics of Derivative Action
In basic terms, a derivative action is when a group of shareholders initiates a lawsuit on behalf of the corporation. Even if the board of directors is not willing to take legal action, a common forum of shareholders is legally empowered to file a lawsuit if a situation exists that may damage the company.
The Role of the Plaintiffs
The plaintiffs – the shareholders taking action — generally adopt a representative role. This allows them to act on behalf of all other shareholders when a misconduct of duty, breach of contract or struggle of corporate control is apparent. The plaintiff(s) must present facts toshow reasonable basis that the defendant’s actions adversely affect the company.
Recently Filed Derivative Actions
The derivative action process is still an efficient mechanism for shareholder justice. For example, in 2019, a derivative action was successfully filed against a hedge fund claiming the fund had withheld corporate information from the board in an attempt to take control of the company. In 2019, a derivative action brought by shareholders also forced a company to halt an unconstitutional stock buyback.
Conclusion
Derivative action is an appealing remedy for shareholders when corporate management are not adequately representing or protecting the company’s interests. It provides a mechanism for shareholders to trigger a legal response where the board of directors has not taken one. When executed judiciously, it can be an effective tool for shareholders to protect the corporate interests and help ensure shareholder justice.