What People Get Wrong About Shareholder Derivative Lawsuits
There are two different types of shareholder lawsuits: 1) Direct actions and 2) Derivative actions. A derivative action is a type of legal claim through which a shareholder (or group of shareholders) seeks to take legal action on behalf of the corporation itself. Shareholder derivative actions are notoriously complex. Below, our West Palm Beach shareholder rights lawyer discussed some of the most common issues that people get wrong about shareholder derivative lawsuits.
- Shareholders are Suing their Own Corporation
Wrong. When you file a shareholder derivative action, you are effectively bringing a claim on behalf of the corporation, not against the corporation. It is not a case where a corporation is suing itself. Instead, the legal action is initiated by shareholders to address wrongdoings committed by the management or board of directors that have harmed the company. This legal action allows shareholders to step into the corporation’s shoes and sue the wrongdoers, often insiders like executives or directors, on the company’s behalf.
- You Can Always File a Shareholder Derivative Claim
Wrong. There are comprehensive legal requirements that must be satisfied before a shareholder can move forward with a derivative action. In Florida, shareholders must demonstrate that they have made a demand on the board to address the issue or that such a demand would be futile. Failure to meet this requirement can result in a derivative action being dismissed outright.
- A Shareholder Derivative Claim is the Same Thing as a Class Action Lawsuit
Wrong. These are distinct terms. While a shareholder derivative claim may be a type of class action lawsuit, they are fundamentally different in their objectives and the nature of the claims. A class action is a lawsuit filed by individuals or businesses against a company, alleging harm directly to them, usually due to the company’s actions or products. In contrast, a shareholder derivative suit is brought on behalf of the company and seeks redress for injury to the company, which indirectly affects the shareholders.
- Shareholder Derivative Suits Only Limited Benefit for Individual Shareholders
Wrong. It depends entirely on the circumstances, but individual shareholders can gain significant indirect benefits through a successful derivative claim. When the claim is successful, any financial recovery goes to the corporation. This, in turn, can improve the value of the company’s stock, thereby benefiting shareholders through increased share value. Beyond, derivative suits can result in changes to corporate governance practices, leading to better oversight and management. It could be the mechanism through which changes are made to the company that help the shareholders.
Get Help From a Shareholder Litigation Attorney in South Florida Today
At Pike & Lustig, LLP, our Florida shareholder rights lawyers have the skills and knowledge to take on derivative claims. Want to learn more about shareholder derivative litigation and your rights under the law. Professional help is available. Contact us now for a completely confidential case review. From our offices in West Palm Beach and Miami, we represent clients across South Florida.