What is a Shareholder Derivative Lawsuit?

An individual shareholder — typically, a minority shareholder — may be able to bring a lawsuit on behalf of the corporation without getting approval from the board of directors. This type of legal action is called a shareholder derivative lawsuit. As a general matter, derivative lawsuits are filed against a third party that is alleged to have wronged the corporation. In this article, our Illinois shareholders’ rights lawyers explain what you need to know about derivative lawsuits.

Types of Shareholder Derivative Lawsuits

A shareholder derivative lawsuit can be filed in a wide range of different circumstances. As was mentioned above, derivative claims are brought by shareholders on behalf of a company. If a corporation was wronged, a derivative lawsuit may be appropriate. Some of the most common examples of shareholder derivative lawsuits include:

  • Breach of fiduciary duty claims;
  • Allegations of fraud;
  • Self-dealing or other insider conflicts of interests;
  • Waste or abuse of company assets;
  • Improper executive compensation; and
  • Complaints over management/board decisions.

Why are Shareholder Derivative Lawsuits Filed?

You may notice the list of common shareholder derivative lawsuits centers around allegations of wrongful actions by board members, executives and other corporate insiders. This is an important point: most often, the primary reason why shareholder derivative lawsuits are filed is because the corporation’s directors and/or decision-makers have declined to take legal action.

Of course, a corporation’s decision-makers can file a lawsuit in a more direct manner. They do not need minority shareholder approval to do so. However, if, for whatever reason, a minority shareholder believes corporate managers are declining to pursue a valid legal claim, then that individual can bring a derivative lawsuit. By doing so, they could potentially protect the company’s interests and their shareholder rights.

Derivative Lawsuits are Complicated: Shareholders Must Comply with Pre-Suit Requirements

Shareholder derivative lawsuits are among the most complex types of legal claims. In most states, including Illinois, there are strict pre-suit requirements that must be met before any legal claim can proceed. Most importantly, minority shareholders generally need to give notice of their complaint to the board and to other corporate directors.

In some cases, the issue may be resolved without a derivative claim ever being filed in court. The board may decide to back a shareholder’s complaint and file a lawsuit in a more direct manner. However, that is not always the case — especially if the underlying dispute involves alleged misconduct by a high-ranking corporate official. If you are considering bringing a derivative lawsuit, it is imperative you consult with an experienced Chicago shareholders’ rights lawyer.

Contact Our Chicago, IL Shareholders’ Rights Attorney Today

At North Suburban Legal Services LLC, our top-rated Illinois shareholders’ rights attorneys are skilled and effective advocates for our clients. Do you have questions or concerns about shareholder derivative lawsuits? We are here to help. To arrange a free, fully private consultation, please contact our legal team right away. With a law office in Chicago, we represent shareholders in Cook County and throughout Northern Illinois.

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