Oftentimes, when an organization has experienced mistreatment or illegal activity, a resolution isn’t as easy as filing a lawsuit. When corporations, directors, or officers have acted in their own best interest, instead of the company’s, a stockholder’s derivative action (or suit) is often required. As the name suggests, this type of suit is filed on behalf of the shareholders of that company. The goal of a stockholder’s derivative action is to recover losses that have been incurred due to mismanagement or other wrongful acts performed by the company’s executives.
The goal of a stockholder’s derivative action is to restore the financial losses suffered by a company due to misconduct, negligence, or other wrongdoings from its senior executives. In a derivative action, shareholders bring a lawsuit upfront in order to recover losses after receiving notice that their company’s executives have acted in an improper or illegal manner. If the case is successful, the company may be required to pay reparations to shareholders, and some of the executives involved may face stiff penalties such as jail time or being fired from their position.
People may consider derivative suits a form of financial crime, as it seeks to protect shareholders from ill-gotten earnings. The purpose of these actions is to hold the guilty parties responsible and set an example to dissuade any other entities from trying the same thing. Further, it can encourage the right kind of management strategies because the stockholders and the company will benefit from them.
Stockholder’s derivative actions can be a powerful way to ensure that executives are held accountable for their actions. By allowing shareholders to file such a suit, they can recoup any financial damages incurred by their company due to wrongdoings of the executive and set an example to deter any other entities from performing similar actions in the future.