Understanding the Shareholder's Derivative Suit

If you are a shareholder of a company facing legal issues, you may have the legal right to take legal action in behalf of the company, which in itself refuses to take legal action.

This is the basic concept of shareholder or stockholder's derivative suit.

A shareholder's derivative suit is another sort of business litigation commonly brought about by one or a group of shareholders as a legal action to prevent or resolve a wrongful act against the corporation. Note the plaintiffs, that is, the shareholders, in a certain derivative lawsuit are not suing as a cause of action for their own interests as individuals. Instead, they are suing as valid representative on a cause of action, actually belonging to the company but for varied reasons the company refuses to take up legal action.

As such, it is the interest of the corporation being pursued, albeit the shareholders are the ones acting on behalf of its interests.

Often, this kind of legal matter involves the actions done or performed by the corporation's executives.  If suspicions have arisen that, an executive of the corporation is using the assets for his/her personal gain, then the shareholders or one of them could bring up a derivative suit against the executive under suspicion.

Significant factors of a derivative suit by shareholders

• It is unlike a direct lawsuit filed by a stockholder in order to enforce a claim that concerns his/her interests in the ownership and allotment of shares. A direct suit concerning the shareholder's personal interests usually involves the statutory or contractual rights, his/her shares and rights concerning ownership of it.

Furthermore, direct suits raised by a shareholder on his/her own interests usually involve actions to inspect records and books of the corporation and recover dividends.

• The main justification behind the permission of derivative suits is that these legal actions provide the shareholder a means to enforce the corporation's claims against the corporation's managing directors and officers.

Since the directors and officers of the corporation are in control, they are not inclined to give authority to the corporation to bring up a legal action against themselves.  The derivative suit gives authority to a shareholder to pursue these claims on behalf of the company.

• Other justifications for bringing up derivative lawsuits are:

-         prevention of multiple lawsuits

-         ensuring that all of the shareholders affected by the wrongful action are given equal portion of the recoveries from the suit

-         Protecting preferred shareholders and creditors against the diversion of corporate assets to be directed to the shareholders

• The shareholder is considered a nominal plaintiff in a particular derivative suit. The corporation then becomes the nominal defendant. However, the corporation usually gains from the recovery if ever the shareholder wins the case.

• Essentially derivative lawsuits are three sided. The defendants may be those who allegedly did actions that harmed the corporation or those who have profited personally from the corporate action.

Meanwhile, the corporation may be assigned with different roles in every derivative suit. It could be either an active or passive during the entire litigation process. It can also position in favor of the defendants.

If you are a shareholder planning to file a derivative suit, make sure to contact with a well-experienced business lawyer to advise you on every significant factor and issue of your derivative litigation case.

Know more information about shareholder derivative suits with the assistance of Los Angeles Lawyers at http://www.mesrianilaw.com/Shareholder-Derivative-Suits.html