What Exactly Is A Shareholder Derivative Lawsuit?

What Exactly Is A Shareholder Derivative Lawsuit?

We reference shareholder derivative lawsuits on a relevant practice area page of our website at the Maricopa County and East Valley business law firm of Cook & Price, PLC.

What exactly are they? When do they come into play, and what is their central role in the business world?

An article discussing shareholder derivative actions makes use of an analogy to quickly impart their key thrust and characteristics.

Consider, if you will, a castle. The cited article notes that such an edifice “on its own has little to no value.” What gives a castle worth is the sustained and good-faith efforts of its knights to ensure it remains a strong and viable fortress.

When, as pointed out, those knights “are either not in the castle, choose not to protect it or hope to use it for their own ends,” there is an obvious problem.

It doesn’t seem much of a stretch to compare a castle to a corporation, knights to upper-echelon business managers and castle denizens to corporate shareholders.

When the modern-world castle — the corporation — is not being perceived as well protected by management, its shareholders can sometimes step forward on behalf of the corporate entity. As the above-cited article states, they do so “to reclaim value lost to the corporation by its management.”

The plaintiffs in a shareholder derivative lawsuit are twofold, namely, the complaining shareholder/s and the corporation itself. The entity is included because the action is aimed at defending its interests against alleged malfeasance by key employees.

The bottom line with a derivative action, unsurprisingly, is that it can be complex, with a number of factors coming into play. Notice requirements guide the process. A complex interplay of federal and state law can feature. Allegations must of course be supported. Time limits might have a material effect on the litigation.

And, of course, challenged business owners might have been acting with the corporation’s best interests in mind all along, with their actions being misconstrued. Their exercised business judgment might not be readily appreciated by shareholders possessing only a limited understanding of corporate objectives and aligned activities.

An Arizona business facing legal challenges posed by a derivative suit or other obstacle can obtain candid guidance, as well as aggressive and tailored legal representation, from a proven Maricopa County commercial law firm.

Call Cook & Price, PLC today at 480-407-4440 or email us through this website.

2017-09-28T05:44:35-07:00 December 12th, 2015|Categories: Business Litigation|Tags: |

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