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What Is a Shareholder Derivative Action?

How a class action lawsuit can help Massachusetts investors

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 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 and corporate directors. This is where a shareholder derivative lawsuit may be necessary.

As noted by Cornell Legal Information Institute, 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—i.e. the officers or 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. Notably, if a shareholder derivative claim is successful in Massachusetts, the proceeds go to the corporation.

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

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