Shareholder Derivative Actions

Corporate Governance

Claims for breach of fiduciary duty typically arise when a company’s directors and officers cause the company to violate the law, exposing the company to criminal or civil penalties, massive losses, and to damaging litigation, such as securities fraud class actions.

The fiduciary duties owed to a corporation by its directors and officers include the duties of due care and loyalty, and require directors and officers to obey the law (and cause the corporation to obey the law).

No director or officer may seize a corporate opportunity for personal gain without giving the corporation the chance to take full advantage of that opportunity. No director or officer may place his or her personal enrichment ahead of that of the corporation. Nor may a director or officer simply abandon his duties to the corporation.

When a company has been wronged by its directors and officers, and might well sue them and recover, a dilemma exists: the very people who have damaged the company and who should be sued are running the company—”the foxes in charge of the hen house.”

In this situation, the law permits a shareholder (the “derivative plaintiff”) to sue the directors and officers in the name of, and on behalf of, the corporation.

The derivative plaintiff need merely demonstrate that a majority of the board of directors lack independence of judgment in the dispute, excusing a demand upon the directors and officers to sue themselves.

If you are a shareholder of a corporation which has been harmed through a breach of fiduciary duty by its officers and directors, and you held your shares continuously from the period during which the wrongs occurred through the present, you may be eligible to bring a claim on the company’s behalf against the directors, officers and third parties, such as the company’s auditors, who harmed the corporation.

Why would you want to do this, rather than file a shareholder class action to recover your own losses?

First, you may already be a member of a class of defrauded or injured shareholders.

If litigation has already been initiated along that front, your interests as a defrauded shareholder will already be protected and you will have the opportunity to make a claim in the class settlement in due course.

Second, holding the responsible parties accountable to the corporation protects your investment by forcing the company to confront its corporate governance shortcomings and clean house.

Many times, after a company has been exposed to claims it violated the law, that its insiders looted the company or engaged in insider trading, it turns out that the company never had fundamental protections in place to protect against these problems.

When a corporation is seen to clean up its act, the value of its stock often recovers significantly. Often, shareholders pursuing derivative claims are uniquely positioned to extract significant corporate governance reforms from the company.

Third, there may be claims that can be asserted derivatively, such as a professional negligence claim against the company’s auditors, that can generate a recovery which might not otherwise be recoverable in a shareholder class action.

By recovering these assets for the corporation, it can make them available to the corporation to contribute to settlement of a related shareholder class action.

Fourth, “What’s in it for me?”

You may be eligible to receive an incentive award, in the discretion of the court, as part of the settlement of a shareholder derivative action.

An incentive award compensates you for your time and trouble in bringing the action, and rewards you for defending the rights of the corporation.

Such awards often exceed the individual damages of the shareholder bringing the action. Notably, incentive awards are unavailable to plaintiffs in securities fraud class actions.

Shareholder derivative cases are brought with the assistance of experienced counsel, who will bear the costs of prosecuting the case and apply for a fee, to be approved by the court, only upon the successful conclusion of the case.

By law, the court must approve the settlement of a shareholder’s derivative case. In many courts, notice must also be provided to the shareholders of the pendency of a settlement.

Schubert Jonckheer & Kolbe LLP specializes in the nationwide prosecution of shareholder derivative suits and has prosecuted more than 65 shareholder derivative actions in more than a dozen different courts since 1996.