When you made the decision to invest in a company, you put your trust in the company’s governing officers to work diligently for the welfare of the company at large – and by extension, of the company’s shareholders like yourself. Thus, when a corporate officer or group of officers acts in a manner inconsistent with the company’s financial health, you and other shareholders might wonder what you would have to prove in order to be successful in a shareholder derivative suit against them.
A shareholder derivative suit is a lawsuit that a group of shareholders presents against officers or directors of the company. When shareholders bring a derivative suit, they do so on behalf of the corporation itself, and on behalf of all shareholders.
In other words, derivative suits don’t exist to vindicate harm caused to a specific shareholder or to vindicate individual rights. Instead, they’re used to protect a company from mismanagement, fraud or conflicts of interest on the part of corporate officers and directors.
Breaches of fiduciary duty
The moment someone becomes a governing officer of a corporation, they immediately assume certain legal responsibilities – known as fiduciary duties. These duties require the officer to take every reasonable effort to make sure that the company’s well-being is at the forefront of their decision-making. They also prohibit the officers from taking actions that benefit themselves at the expense of the company, and of the shareholders.
In order to be successful in a derivative suit, your attorney will have to prove several elements. First, they will have to prove that a fiduciary duty exists and binds the corporate officer that you are suing. Next, they will have to show exactly how the officer’s actions constitute a breach of that fiduciary duty. Finally, they will have to demonstrate how the breach of fiduciary duty caused the company – and the shareholders – demonstrable harm, economic or otherwise.
It can be infuriating to feel like your company’s directors are deliberately cheating you of the benefits of your investment. Under the right circumstances, a derivative suit for breach of fiduciary duty may be what you and your fellow shareholders need to rectify the situation.