A shareholder’s derivative action is a type of legal action or lawsuit that is brought by one or more shareholders on behalf of a corporation in order to protect the organization and its shareholders from wrongful or illegal activity. It is a way for shareholders to pursue a claim in a court of law on behalf of the company when there are no instructions in the company’s bylaws to do so.
In a shareholder’s derivative action, the shareholder will act as a representative of the corporation and, when successful, any damages achieved will go to the corporation rather than directly to the shareholder. An example of such a lawsuit is a company director who doesn’t fulfill her legal duties. The shareholder can bring a lawsuit as the corporation’s representative to seek damages from the director.
These actions are sometimes seen as controversial because shareholders get to decide whether to pursue a derivative action even if the company’s board does not wish it. Any decision is typically reviewed by a court to ensure it is going to benefit the company.
Why Use a Shareholder’s Derivative Action?
The goal of shareholder’s derivative action is to ensure that shareholders are able to receive adequate and fair compensation for wrongdoings. For example, if a company has directors who have signed a contract with another company that subsequently causes financial harm to the corporation, shareholders can bring a derivative action against the directors to recover the lost funds. In some cases, the company can even be awarded punitive damages if the court rules that the directors were grossly negligent.
Shareholders can also use derivative action as a means of stopping illegal or unethical conduct by the company’s executive officers. For example, if the officers are found to be taking part in insider trading, a derivative action can be brought to demand that the officers cease the activity and that the company be compensated for any losses associated with the misconduct.
Conclusion
Shareholder’s derivative action is an important tool in the hands of shareholders that allows them to seek justice and fair compensation if the company, or its executives, have acted unethically or illegally. In most cases, these actions provide a means for shareholders to ensure that the business is being run in the best interest of the company and its shareholders.