What Is a Shareholder Derivative Action?

Use these links to jump to different sections:

• Understanding the Basics
• When Should Investors Bring a Class Action Claim?

Minority shareholders have a vested interest in the health and success of a corporation. However, they have relatively little control over what actually happens within the company—as management, including the board and the directors, are responsible for making key decisions for the company.

In many different ways, this structure exposes minority shareholders to certain risks. A shareholder derivative action is an important legal tool that can be used to help shareholders protect the best interests of the corporation and, as a result, preserve their own financial interests.

Understanding the Basics

Minority shareholders have important legal rights. For example, under Massachusetts state law, shareholders have the right to inspect the books of a closely held corporation.

Unfortunately, in certain situations, individual shareholders conducting a review of the company’s actions may find some troubling information about the conduct of corporate officers or directors. This is where a shareholder derivative lawsuit may be necessary.

A shareholder derivative suit is one brought by a shareholder, or a group of shareholders, on behalf of the corporation itself. Generally, this type of legal claim can only be brought when the corporation has a valid cause of legal action but is choosing not to pursue a claim. In practice, shareholder derivative claims typically involve allegations against an insider of the corporation.

What makes shareholder derivative claims unique is that most corporate claims are brought by management. In other words, the officers or board of directors of a corporation determine whether or not it is advisable to take legal action. With a derivative claim, however, shareholders may be able to override management’s decision not to act.

When Should Investors Bring a Class Action Claim?

For the minority shareholders of a company, a shareholder derivative claim is only one of the available legal remedies.

An alternative option is to file a class action lawsuit. Through a class action lawsuit, a group of similarly situated parties who have a common set of damages can join together to pursue a legal claim. Depending on the specific nature of the case, it may be advisable for shareholders who have suffered losses as a result of the misconduct or negligence of corporate directors to file a class action claim.

Both shareholder derivative claims and investor class action lawsuits are highly complex. If you are considering filing a shareholder derivative claim or a class action lawsuit as an investor, you should contact a law firm and seek legal advice from an experienced Massachusetts class action attorney. Here are some questions to ask an attorney when meeting for the first time:

• What is your experience practicing business litigation?
• What sort of cases have you handled?
• What are your attorney’s fees and billing options?
• Do we have a good cause of action?
• What constitutes a breach of fiduciary duty? How do you prove a breach of duty of care?
• What are the legal requirements to file suit on behalf of the company in a shareholder derivative action?

For more information on this area of law, see our overview of class action and mass torts.