Business law and accounting: Shareholder derivative lawsuits

he structure of corporations can be complex, particularly when the business is significant in scale. There may be several key shareholders who own a stake in the company. However, not all shareholders are necessarily involved in the day-to-day decision making of the enterprise.

What is a shareholder derivative lawsuit?

When the business is profitable and everything is above board, then the shareholders should be satisfied. Nonetheless, there are occasions where shareholders may feel aggrieved because the directors of the company may have breached their duties, resulting in damages to shareholders and potentially employees. Under these circumstances, one option shareholders have is to bring a derivative lawsuit against the breaching directors on behalf of the company.

Placing a written demand on the board

There are a few steps that must be taken before a derivative suit can be filed. The concerned shareholders should compose a written demand to the company directors, and they will typically have up to 90 days to respond. The demand letter should state clearly the alleged breach as well as the desired remedy. If the board fails to respond or rejects the demands, then the derivative suit can go ahead. In some cases, when the damage to the corporation would be irreparable without a prompt response, the lawsuit can go ahead before the 90-day period expires.

Quantifying the damages

Assessing and quantifying the damages in a derivative suit can be complex. Thus, it is often necessary to enlist the help of an accounting team who can prove that the alleged breach resulted in financial harm to the company. One example would be if a director made misleading statements that resulted in a drop in value of the company shares. It’s important to note that if the suit is successful, any proceeds are awarded to the corporation and not the shareholders individually.

Shareholders have the right to lodge a legal complaint should directors breach the duties that they owe to the corporation. We provide legal guidance to shareholders. Contact us for a consultation.