Shareholders sometimes file lawsuits to protect their interests in a corporation or because of harm done by the corporation. The most common types of shareholder actions are: derivative actions, direct actions, and appraisal actions. In this article, our Irvine shareholder litigation lawyers provide an overview of each of these types of actions.
Derivative suits are filed when a shareholder wants to sue the directors or officers of a corporation for actions or behavior that have allegedly harmed the corporation, e.g., insider trading, breach of fiduciary duties, bad management, harmful board decisions, and waste. Derivative suits are necessary because there is no guarantee that the individuals working internally in the corporation will try to fix a problem that they are causing. The shareholder who files a derivative lawsuit (the “plaintiff”) seeks an equitable remedy; that is, the goal is to have the judge order the directors or officers (the “defendants”) to act or stop acting in a particular way.
Standing (Who May File Suit). You may file a derivative action only if you are a shareholder who actively owns stock in the corporation at the time the alleged wrongs are committed. Occasionally, a shareholder will try to file suit for wrongs committed before he owned stock in the company. In those cases, the shareholder’s claims will be dismissed because he does not have legal “standing” to sue.
Demand. Before filing a derivative action lawsuit, a shareholder must formally demand that the board of directors fix the problem at issue. An experienced Irvine shareholder litigation lawyer can assist you with this, to ensure that your demand is in the proper form and is timely filed.
Investigation. After you make a demand on the board, the board will form a committee to investigate your claims. If the committee finds that the claims have some merit, the board will make a recommendation to support the lawsuit.
Filing without the board’s support. If, however, the committee finds no merit to the claims, and the board does not support the derivative action, then you will have to decide whether to proceed with the derivative suit on your own. Caution: If you decide to go forward on your own and you lose the lawsuit, you may have to pay the defendants’ litigation costs.
Filing. The next step is actually filing the derivative claim with the court.
Notice. Whether or not you have the board’s support, you must give notice to all the other shareholders that you have filed a derivative action and that they can join in if they choose.
Remedies. When you are making the decision to file a derivative suit, keep in mind that a successful shareholder rarely receives monetary compensation. The purpose of a derivative suit tis to protect the value of shares in the corporation. Thus, if you win, the court will order the directors and officers to remedy the wrongs going on inside the corporation, which your lawsuit brought to light.
As a shareholder, you may file a direct action against the corporation if you have been injured personally. (Compare this to a derivative suit, which is filed to remedy a wrong or injury against the corporation.) What sorts of behavior by the corporation result in direct claims? Fraud and dishonesty are the most common types of conduct that spur a direct action. Often in these instances, an agent of the corporation has lied to a shareholder or misrepresented information in a report, which caused the shareholder to buy shares in the company in false reliance on this information.
Standing. You can file a direct action only if you actively owned shares in the corporation at the time the injurious actions were taken.
Class claims. Direct claims may also be filed by a class of shareholders that have a common injury. In that case, if the class action is successful, each individual shareholder will collect “damages” – monetary compensation for the harm done.
If the board of directors has plans to sell the entire corporation or to sell some of the corporate assets, or if a merger has been negotiated, then you, as a shareholder, may file an appraisal suit if the amount you are to be compensated for your shares is less than fair market value. Once a sale or merger has begun, a court cannot stop it. However, a court can order that shareholders receive fair market value for their shares.
Notice and Voting. You must file a notice that you are seeking appraisal before the vote on the transaction occurs. Furthermore, you may not vote in favor of the transaction if you plan to seek an appraisal; the better course of action in this situation is to abstain from voting.
Shareholder actions often are procedurally complicated and substantively complex. If you have questions or concerns about the conduct of a corporation or its officers or directors, contact our experienced Irvine shareholder litigation lawyers. You can reach us by phone or email. We will respond promptly.