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What is Derivative Litigation?


A shareholder derivative suit is a type of litigation brought by one or more shareholders on behalf of a corporation against third parties (generally the officers and directors of the corporation) to remedy harm done to the corporation because of the actions (or inaction) by the officers and directors. In a derivative suit, the plaintiff shareholders do not sue on a cause of action on behalf of themselves as individuals. Instead, they sue as a representative of the company on a cause of action on behalf of the corporation. The fundamental basis of a shareholder derivative action is to enforce a corporate right that the corporation has. Thus, plaintiffs in derivative suits may allege various breaches of fiduciary duty by management and/or the corporation’s board of directors, including negligence, mismanagement, self-dealing, fraud, or waste of corporate assets.  Since few Boards will ever act to correct alleged wrongs, a shareholder often steps in and brings suit on behalf of the corporation to compel it to correct the alleged wrongs being perpetrated by the officers and/or directors. The real party-in-interest in a derivative action is the corporation, and the individual shareholders are suing on its behalf. Derivative suits involve shareholder enforcement of corporate obligations (called corporate governance), which may intrude on the traditional management powers of the Board of Directors.

Derivative suits provide a means for shareholders to enforce claims of the corporation against managing officers and directors of the corporation. Officers and directors who are in control of a corporation are unlikely and unwilling to authorize the corporation to bring suit against them. A derivative suit permits a shareholder to step into the corporation’s “shoes” to prosecute these claims in the name of the corporation for the wrongs committed which affected the corporation and its business operations. Shareholders who bring derivative suits do not do so for any monetary gain, but merely as an impetus to force the company to hold its officers and directors accountable and liable for actions they have taken on the corporation’s behalf.

In most jurisdictions across the United States, a shareholder must satisfy various statutory requirements to prove that he has valid standing to bring a derivative action against the officers and directors, the most important of which is that the shareholder continuously held stock at some time during the period of time in which the company is being accused of fraud, negligence, etc., and that shareholders bringing the derivative actions agree to continue to hold their stock throughout the derivative litigation to preserve their interests in the outcome of the litigation.

Our firm has extensive experience in securities and derivative litigation.  For over 30 years, Federman & Sherwood has represented individual investors, brokerage firms and financial professionals in all aspects of securities fraud and business litigation. Our attorneys have appeared at hundreds of class action and derivative hearings nationwide on behalf of our clients, and have been recognized by various courts for its expertise and aggressive representation of its clients. As a result, our firm has been selected as lead counsel in many derivative and securities class actions across the county.  Federman & Sherwood has recovered millions of dollars for investors in multiple securities actions, and has caused the implementation of stronger corporate governance in multiple derivative actions.

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