06 Feb Derivative Lawsuit: IS IT for Every Shareholder?
Investors who buy stock in a corporation become part-owners. Do you own a single stock in Apple? Today, a single stock in the Goliath company would cost you over $300, but that simple $300 would make you a minority shareholder, and therefore part-owner of the company.
Imagine that you notice that the directors or managers of the company have made some questionable decisions which you believe are hurting the company. Then you wonder could a minority shareholder of the company with seemingly little influence on a company intervene and protect the company from further damage? Could I raise my concerns on the company’s behalf? How could I make your voice heard? Yes, you can act on behalf of the company to protect its interests by filing a derivative lawsuit.
Unfortunately, there are many minority shareholders of companies who think they’re too insignificant to be able to do anything in certain situations. The truth is, in fact, the opposite.
What is a derivative lawsuit?
A derivative lawsuit is one that is brought forth by a minority shareholder, or minority shareholders. A direct lawsuit—the opposite of a derivative lawsuit—is one that most people are accustomed to hearing, and this is one that comes directly from the shareholder’s with a majority stake in the company.
For example, if a President of a corporation who owns 51% of the stocks—making them a majority shareholder—brings a claim on his/her own, based on his/her own ownership shares, this is a direct lawsuit.
However, you don’t need to be a majority shareholder to file a lawsuit on behalf of the company. A derivative lawsuit gives minority shareholders the ability to sue on behalf of the entire company to protect the company’s interests. Much more weight behind the punch, right? There is, and this is the reason individuals choose to go this route.
Conversely, a derivative lawsuit is one brought about by a minority shareholder who wants to sue on behalf of the entire company to protect the company’s interests. Much more weight behind the punch, right? There is, and this is the reason individuals choose to go this route.
What would cause minority shareholders to sue?
If someone wrongs a corporation and causes hardship to stockholders, everyone who owns shares of that corporation is going to be upset. Investors in corporations expect certain measures to be met and for their investments to pay off, so if another person or company interferes, they’ll want recourse.
However, if the board members or executives of the company in which minority shareholders have invested don’t want to act on any devious behavior that would cause the company harm…well therein lies the problem.
In this case, many minority shareholders would grunt and shake their fist and be on their way, assuming there is nothing they can do to resolve the situation at hand—after all, they don’t own enough shares in the company to be able to act on its behalf.
This is where derivative lawsuits factor in. Derivative lawsuits allow minority shareholders in a company to do exactly that: sue on behalf of the company in which they invest.
How to move forward with a claim
As representatives of businesses with shareholders big and small, we’ve been through scenarios such as this. If you find that the company you’ve invested in has been wronged or there are frivolous or questionable activities or ongoing decisions and your directors won’t act to protect the company, you have the option to do so.
The process of moving forward with a derivative lawsuit may seem intimidating, but our experienced team of lawyers can help you navigate your way through the litigation process.