What are Shareholder Derivative Actions?
Shareholder derivative actions are lawsuits filed by a shareholder in a corporation on behalf of the company itself. This type of litigation addresses harms that have been done to the company but which the directors of the company have — for whatever reason — chosen not to pursue.
There are many reasons why a corporation might opt out of pursuing claims against an individual or entity that has harmed it. One of the most common is when it’s been discovered that one of the corporate officers or directors has caused damage through a breach of contract or of fiduciary duty. While the company’s board and officers are tasked with protecting the organization, when they prove themselves unwilling to pursue action in the company’s better interest, shareholders can assume that role.
An example of a shareholder derivative actions can be found in today’s headlines. Shareholders of Exxon Mobil Corporation, the multinational oil and gas company, have filed suit against several of the company’s officials, directors, and board members, accusing them of having failed to protect the company and their investments from the risks of climate change. The suit, filed by a mutual fund, states that the defendants “knew, were reckless, or were grossly negligent in not knowing” that Exxon was misleading its investors regarding the risks of climate change to its business. It also accuses executives of filing misleading paperwork with the SEC and other offenses, all of which they say led to a devaluation of the stock.
In order to be valid, a shareholder derivative lawsuit must be filed by an actual shareholder, though there are variations in the interpretation of these rules in different states. Some allow a claim to be filed as long as the shareholder-owned stock when the harm was being done, while others require continuous ownership. In almost all cases, the shareholder must be able to prove that they tried to get the company’s directors to take action by calling the problem to their attention.
When a shareholder derivative lawsuit is successful and there is a compensatory ruling, the money goes back to the company. This means that it is for the benefit of the company and for all of its shareholders rather than for themselves. If you are a shareholder in a corporation and you believe that it has suffered harm that the company’s board should be pursuing legally, we can help. Contact us today to learn more about your rights as an investor.