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A derivative action is a lawsuit brought by shareholders on behalf of a company when it fails to protect its legal rights and interests. Such lawsuits are usually brought against officers or directors for fraud or mismanagement. Shareholders can hire lawyers to pursue the case, but the costs can be high. Dishonesty, mismanagement, corporate fraud, self-harm, and questionable ethical activities can be addressed with derivative actions. The company may initially be the defendant, but may become the plaintiff depending on the situation. Such cases may attract public interest and attention.
A derivative action is a lawsuit brought by a company’s shareholders on behalf of the company because the company is not taking action to protect its legal rights and interests. Such seeds are also known as derivative seeds or shareholder derivative seeds. They are somewhat unusual in a legal sense because companies are expected to be able to defend themselves and take appropriate action when a business detracts from their interests.
Usually, a derivative action is brought against a company’s officers or directors. These lawsuits occur when shareholders believe that there is fraud, mismanagement, or other activity that could harm the company. In these cases, the company cannot act alone because it is unable to do so; if it’s the directors who defraud the company, for example, they won’t sue themselves. Shareholders can also bring such actions if they believe a company is not taking appropriate action in response to management issues.
Shareholders usually maintain a legal team to assist with filing and pursuing the derivative action in court. Firms can bring in their own lawyers to take the case and the costs can quickly become quite high, between the court fees associated with the legal proceedings and the billable hours for the lawyers involved. Due to the costs, such lawsuits can be difficult to sustain to the end, especially if not all shareholders are interested in cooperating.
Dishonesty, mismanagement, corporate fraud, self-harm and questionable ethical activities can all be addressed with derivative actions. A shareholder of a corporation has the right to bring such a suit because the corporation has a responsibility to conduct itself in a way that benefits the shareholders; by insisting that the company protect its interests, the shareholder also protects its personal interest in the company.
When shareholders bring a derivative action, the company may initially be defendant, but may move into the role of plaintiff, along with the shareholders, depending on the structure of the lawsuit and the situation. Such cases sometimes attract public interest and attention, especially if a company has already developed a high profile as a result of questionable activities. Publications covering the financial industry may discuss such lawsuits in detail even when the mainstream media does not cover them, and such publications may also discuss the legal aspects of derivative action in detail, for those interested.
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