Shareholders play an important role at any publicly-traded business. They purchase stock, often when the company needs capital, which gives them an interest in the company. They attend shareholder meetings where they discuss the future of the company. They may vote on certain matters about the future of the organization. They want to see the company succeed, in no small part because they receive dividends or a share of profits.
Occasionally, shareholders make the difficult decision to initiate a lawsuit against the company in which they have invested. Derivative lawsuits are often an attempt to protect a company from perceived mismanagement or corruption.
How derivative litigation works
Typically, those filing lawsuits do so on their own behalf. They assert contract violations or actionable misconduct that violates regulations. They seek relief via injunctions, contract rescission or an award of damages.
Derivative lawsuits are different. Shareholders file litigation on behalf of the company. They may take action against a coalition of majority shareholders in some cases or executives in others.
The goal of derivative litigation is to prevent harmful business decisions or respond to harm already caused by the mismanagement of the company and its resources. Derivative of lawsuits can result in injunctions prohibiting transactions. They can also hold executives accountable for the economic impact of their improper business choices.
Both shareholders contemplating derivative actions and executives responding to shareholder lawsuits may need support as they navigate complex business litigation. Consulting with a business lawyer before filing a lawsuit or when responding to one can help those with an interest in a company avoid controversy and protect that organization.