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Tampa Estate Planning Attorney > Blog > Business Formation > An Intro to Shareholder Derivative Lawsuits

An Intro to Shareholder Derivative Lawsuits

If you are a shareholder or member of a company or an LLC, you may have an issue with the way that a company is being run or operated. In fact, you may even believe that you are owed money in the form of distributions, and that you are being deprived of those funds.

A common complaint is that the officers or directors are running a business in a way that is preventing any profits to be realized. That may be purposeful, such as an officer secretly “cooking books,” or not on purpose, such as simple gross mismanagement.

Shareholder Derivative Lawsuits

If you are a shareholder or member with these kinds of concerns, you may think you can just jump into court and sue. You can’t. Your rights are usually limited to what is known as a “derivative suit.”

Generally, a “derivative suit” is where you, as a shareholder or member, sue the company on behalf of its shareholders. In practice, it is similar to a company suing itself to compel itself to act properly and treat (or pay) shareholders fairly.

To sue, the company must be doing something that is injuring all shareholders, not just you individually.

For example, a company whose president is selling all of its goods to the president’s wife for under cost, thus resulting in a no-profit, no-dividend situation, is appropriate for a derivative suit, because the injury—loss of dividends—affects all shareholders, as well as the company itself.

A company president who does not abide by a services contract between the company and you, however, causes an injury that is personal to you. Thus, you would bring that lawsuit on behalf of yourself.

You must own stock or shares in the company to bring a derivative action (or have owned them at the time that the events for which you are suing occurred). If you don’t, you have no standing to bring the lawsuit.

Why Are They Brought?

Derivative suits can be brought for a number of reasons. A company’s breach of its fiduciary duties to its shareholders is a common and obvious one. This may include conflicts of interests with company officers, purposeful theft or misrecording of finances, or diversion or use of company assets and money for non-company purposes.

A derivative lawsuit can also be made for pure incompetence, but that’s a high burden. So long as a corporate officer is acting in good faith, they are generally immune from suit individually or in a derivative suit. This is especially true when a board of directors knows of, or ratifies, the behavior. A shareholder on a board of directors that reviews accounting statements every meeting and says nothing may be prevented from bringing suit.

Companies, especially small ones, are often run and owned by friends, family, or closer acquaintances. It can be hard to see through that for the good of the corporation. But even small companies have to run in compliance with the law. Shareholder derivative suits are a common way for even the smallest shareholder to enforce their rights, and ensure the health of the company.

Avoid the risk of lawsuits and shareholder disputes, and make sure that your company is operating fairly and properly. Contact Tampa business attorney David Toback to discuss your needs and make sure everything is handled correctly.

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