Top 5 Reasons Shareholders File Derivative Actions
Shareholders can take matters into their own hands and file a lawsuit against officers and directors when they have engaged in misconduct. Shareholders may file derivative lawsuits for a number of reasons. This post will discuss five of the most common grounds for shareholder derivative lawsuits. The shareholder derivative litigation attorneys at Federman & Sherwood can help you file cases on these grounds.
If you are wondering whether the circumstances surrounding your investment and how it has been impacted by corporate actions can lead to a lawsuit, speak to a shareholder derivative lawsuit attorney at Federman & Sherwood by calling us at (800) 237-1277. Your free initial consultation can give you valuable knowledge and information and become the first step towards taking legal action.
What Is a Shareholder Derivative Lawsuit?
As a shareholder, you have a legal right to file a lawsuit against the directors and officers of the company in which you own shares. Here, your aim is not to recover money for yourself. You are seeking to recover on behalf of the company that was wronged by its officers and directors. Presumably, this action would benefit your investment because it would return money to the company. Here are five common reasons why shareholders file derivative lawsuits against companies.
Breach of Fiduciary Duty
Corporate officers owe a number of fiduciary duties to the company that they serve and the shareholders. Primarily, the two main duties are:
- Duty of care: officers have a legal obligation to the company to use due diligence in conducting business operations. Essentially, they must avoid being negligent in carrying out the business of the company.
- Duty of loyalty: officers must place the interests of the company ahead of their own personal interests. Notably, they must avoid conflicts of interest in corporate transactions, or ensure that they are fully disclosed to the shareholders, who could then make their own decision.
Shareholders often sue for this reason when officers have mismanaged the company, or they have engaged in self-dealing.
Corporate Mismanagement
This ground of lawsuit is closely related to breach of fiduciary duty. shareholders may be able to hold officers and directors accountable when the company has failed to manage its own business properly. For example, officers may have failed to engage in proper oversight of operations, leading to compliance failures. Other circumstances that can give rise to these lawsuits include wasting corporate assets in ill-advised transactions. Executives can even be accountable for the failure to act in certain situations, such as when there have been cybersecurity breaches.
Fraud and Misrepresentation
Corporate executives may commit fraud in a number of ways that could lead to a shareholder derivative lawsuit, including the following:
- Making false statements to regulators that lead to large fines
- Manipulating financial statements to present an overly rosy picture to investors
- Concealing material risks from shareholders
- Engaging in related-party transactions that result in inflated payments
- Using non-public information for their personal gain in an insider trading scheme
Excessive Pay to Executives
Companies walk a fine line when they grant pay packages to executives. While they want to recruit and retain qualified and talented leaders, they also owe an obligation to their shareholders not to grossly overpay them. In some cases, companies give excessively large pay packages to executives, such as by granting them a large number of options. These pay packages harm the shareholders because they dilute the value of the stock, or they waste precious corporate assets.
Cybersecurity Violations
As the number of data breaches in the country has proliferated in recent years, shareholders have taken to filing derivative lawsuits to recover for some of the damage done to the company. The fact that corporate officers fail to take adequate measures to protect customer data can cause significant financial and reputational harm to the company. Shareholders may seek to recover directly from the officers for the value of class action settlements and harm that was done to the company’s reputation.
Note that the same corporate misdeed can be cited in numerous ways in a lawsuit. For example, fraud is very similar to breach of fiduciary duty, and you may file a lawsuit under both legal theories. Cybersecurity incidents may be a breach of fiduciary duty because the executives did not exercise due care.
Contact a National Shareholder Derivative Lawsuit Attorney
If you own stock in a company, and you lost money due to wrongful corporate action, speak to a national shareholder derivative lawsuit attorney at Federman & Sherwood to learn whether you can take legal action on behalf of the company. You can schedule a free initial consultation with one of our attorneys by filling out an online contact form or by calling us today at (800) 237-1277.