Protecting Investor Rights Through Shareholder Derivative Litigation - Morgan and Morgan
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Shareholder Derivatives

Protecting Investor Rights Through Shareholder Derivative Litigation

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Shareholder Derivatives

Executives of publicly traded companies have a duty to act in the best interest of their shareholders. When a company’s directors and officers commit fraud, act negligently or otherwise exercise poor management, oursecurities litigation attorneys can take legal action to help put the company back on the right track.

In most cases, shareholder derivative lawsuits are filed by an investor or group of investors on behalf of the corporation to compel the board of directors to remedy or prevent harm to the company and, ultimately, those who have invested in it. By providing shareholders with a legal mechanism for challenging corporate behavior, these lawsuits serve an important function in protecting shareholders and improving corporate governance measures.

Our securities attorneys represent both institutional investors and individual shareholders in derivative actions. Contact us today to learn more about how we can help.

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  • What Is the Purpose of a Shareholder Derivative Lawsuit?

    Shareholder derivative lawsuits are brought for the benefit of the corporation, as well as its shareholders. The purpose of these lawsuits is to enforce a corporate right that the corporation has not enforced. Because the officers and directors who manage a corporation may be reluctant to take legal action against a fellow officer or director, even if serious misconduct has occurred, securities law allows a shareholder the chance to protect his or her investment by filing a shareholder derivative lawsuit.

  • What Types of Corporate Misconduct Can Be Corrected Through a Lawsuit?

    Our attorneys help shareholders file lawsuits to end and remedy corporate misconduct, such as:

    Breach of Duty of Care: Under the duty of care, directors and officers have a responsibility to act prudently in managing the affairs of the corporation. They must also act on an informed basis when making business decisions. While courts generally do not second-guess decisions made in good faith, a director or officer may have breached his or her duty of care if he or she did not exercise rational judgment, acted in bad faith or was not reasonably informed when making a decision.

    Breach of Duty of Loyalty: Under the duty of loyalty, a director or officer may not profit at the expense of the corporation and must put the financial interests of the shareholders above his or her own personal interests. Shareholder derivative lawsuits involving the breach of the duty of loyalty may allege self-dealing, misuse or waste of corporate assets, or abuse of corporate privileges, such as using corporate-owned jets for personal trips.

    Accounting Malpractice: Corporate executives are under intense pressure to increase earnings each quarter. When directors and officers approve the use of aggressive accounting techniques or violate generally accepted accounting principles to overstate or manipulate earnings, our attorneys can help the company’s shareholders file a lawsuit to remove the directors and officers who had knowledge of the accounting improprieties. In addition, through shareholder derivative litigation, the company may be required to enact oversight measures designed to prevent similar types of fraud from occurring in the future.

    Inappropriate Mergers and Acquisitions: Shareholder derivative lawsuits are frequently filed to challenge proposed mergers or acquisitions. For example, if a target company’s directors and officers have failed to properly evaluate a proposed merger or have failed to seek higher offers for the company’s shares, they may have breached their fiduciary duties by failing to maximize shareholder value.

    In addition, our attorneys help shareholders file lawsuits when a company’s directors and officers do not appropriately address violations of environmental law, wage and hour regulations and workplace safety guidelines.

  • What Are the Benefits of a Shareholder Derivative Lawsuit?

    Most successful shareholder derivative actions produce meaningful corporate governance reforms that are intended to prevent future wrongdoing and increase shareholder value. For example, in a case involving allegations of accounting fraud, the lawsuit may result in the company committing additional resources to oversight of its accounting department and outside auditors.

    In general, the plaintiff in a shareholder derivative suit does not seek financial compensation, but instead seeks to protect his or her long-term investment in the company by imposing meaningful corporate governance reforms and management changes. If a lawsuit does seek monetary damages (for instance, in a case involving an executive who embezzled corporate assets), any financial recovery obtained goes to the corporation rather than the individual shareholders.

  • Incentive Awards for Filing a Lawsuit

    As a reward for defending the rights of the corporation, the judge may approve an incentive award for the shareholder who has filed a successful derivative lawsuit. The incentive award is also intended to compensate the plaintiffs for the time and trouble associated with filing a shareholder derivative action. Incentive awards in these lawsuits generally range from $5,000 to $50,000 per plaintiff.

    If you are an investor in a company whose directors and officers are not acting in the best interests of shareholders, you may be able to protect your investment through a shareholder derivative lawsuit. To learn more about your legal rights, get in touch with us today.

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