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On shareholder derivative suits: explanation and example

Ideally, corporations act toward a single, unified vision. With this ideal in mind, the law may offer protection when an alleged injury to a company results in a case against board members or other leaders. In short, corporations do not necessarily have to sue themselves. 

However, shareholders may, in some cases, take up the claim on behalf of the corporation. This type of procedure begins with a derivative shareholder action. 

What is a shareholder derivative suit?

As explained by the Cornell Law Library, a shareholder derivative suit is a type of business law action. This category has several important distinctions when compared to other types of corporate disputes: 

  • The corporation typically must decline to bring action. 
  • Shareholders begin the suit, but the corporation is the plaintiff. 
  • The corporation collects the proceeds if the complaint is successful. 

These cases are among the most difficult to prove in corporate law. Furthermore, the shareholders must often strategically consider the case on a cost-benefit basis. The outcome they desire is almost always to repair and prevent further damage to the company — not to put further strain on corporate resources. 

How do you start a derivative suit?

The initial claims and facts of these suits are of utmost importance. As illustrated in an article in Forbes, two similar derivative claims against large banks resulted in two very different results. 

One of these claims had a basis in a long-term, sustained series of similar actions that damaged the company and of which the board was aware. The other derived from a less-defined grouping of actions which led to losses. 

The outcomes of these two shareholder actions do not necessarily indicate which type of evidence will succeed and which will not. Rather, it shows how an adept business-plaintiff’s law firm organized information and brought suit appropriately in one situation, and how an equally skilled defense team dismantled a claim in the other.