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Why Do Shareholder Derivative Lawsuits Get Filed?


When you have shareholders, and those shareholders become upset at the way the company is being governed, or at the decisions the company makes, those shareholders can file what is called a shareholder derivative lawsuit against the company.

A derivative lawsuit is a shareholder, on behalf of all shareholders, who sues the company and often its individual officers, or owners. Needless to say, this isn’t a light action—often, a shareholder has to be pretty upset or feel quite wronged, in order to warrant such a drastic measure.

But what is it that causes shareholders to file derivative lawsuits? Why do they get filed?

No Money = Bad Decisions?

Yes, shareholders file derivative lawsuits because they aren’t getting the return they thought they’d get on their investment as a shareholder. But just not getting enough money is not a legal basis to support a shareholder derivative lawsuit.

If the company is otherwise being operated and managed safely and carefully, shareholders cannot bring (or win) shareholder derivative lawsuits. Many shareholders don’t know this, and they will bring these lawsuits, just because they aren’t making money.

If, on the other hand, the shareholders aren’t making money because of some kind of mismanagement—or some of the things listed here—then they would have a valid suit.

The business judgment rule protects owners and operators and managers of companies. You don’t always have to make the right decisions. You only have to make careful, prudent and well thought out decisions.

So long as those who are operating the company can show they did their due diligence or had some rational, thought out basis for making the decisions they made, the business judgment rule will protect them from liability.

Self Dealing

Self dealing is when an officer or director of the company makes a personal profit from the company, cheating the company, and thus its shareholders, from realizing that profit. This can be diverting corporate opportunities to the officer or directors’ own companies, or simply retention of money or assets that should belong to the company itself.

This is a very serious claim, and can get an officer in trouble.

Conflicts of Interest

Related to these kinds of claims, are claims of conflicts of interest. This is where an officer or director may own, have a stake in, or get some benefit from, a competitor of the company doing well. As a result, the officer or director may divert opportunities to that company—or may simply just not do everything he or she can, to make this company profitable.

The directors may also sell shares of the company to competitors, or give competing companies access to company trade secrets or customer lists. Usually, directors who do this, have some stake in the other company, and thus, conflicts of interest and self dealing claims, usually go hand in hand.

Do you have a shareholder derivative lawsuit to bring or defend against? Call the West Palm Beach business litigation attorneys at Pike & Lustig today.

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