Executives of publicly traded companies are legally obligated to act in the best interests of their shareholders, yet corporate misconduct is not uncommon and often has an adverse impact on investors. Officers and directors may be reluctant to take legal action against fellow executives, however, even in the event of a serious breach. When the value of a company is diminished due to mismanagement or unlawful conduct by directors and officers, shareholders may bring a derivative lawsuit against the board of directors and other responsible parties.
Ajamie LLP has significant experience handling shareholder derivative lawsuits and class actions. A derivative lawsuit is filed by an investor on behalf of the corporation, and seeks to compel the board to remedy a harm and protect the interests of shareholders.
Shareholder Derivative Lawsuits
Although a derivative lawsuit is brought for the benefit of both the corporation and its shareholders, the plaintiffs do not seek financial compensation. They instead seek to protect their investment by imposing corporate-governance reforms and management changes, and any proceeds of a successful action go to the corporation, not the shareholders.
The rules and procedures for derivative lawsuits vary by jurisdiction. Generally, however, a shareholder must show that he or she has standing, which in most cases means holding a minimum value of shares for a specific period of time. Before initiating a lawsuit, a shareholder must demand that the board take legal action. Then, if the board rejects the demand or refuses to act, the shareholder may sue. In short, the goal of a derivative lawsuit is to invoke a corporate right that the directors have not enforced.
Types of Corporate Misconduct That Can Lead to a Derivative Lawsuit
Shareholders may file lawsuits to remedy all types of corporate misconduct, including:
- Breach of Duty of Care – Directors and officers have a duty of care to act responsibly in managing corporate affairs, and must act in good faith when making business decisions. A director or officer may breach this duty by acting in bad faith, not being reasonably informed, or not exercising rational judgment.
- Breach of Duty of Loyalty – Directors and officers cannot profit at the expense of the corporation. They must put the financial interests of the shareholders first. A breach of duty of loyalty may involve self-dealing, misuse or waste of corporate assets, or abuse of corporate privileges, such as using corporate funds for personal use.
- Accounting Malpractice – Executives must adhere to generally accepted accounting principles (GAAP). They cannot use aggressive accounting techniques in order to overstate or manipulate earnings. Shareholders may bring a lawsuit to remove directors and officers who participated in or knew about any improprieties. A derivative lawsuit may also seek to compel the company improve its governance measures in order to prevent similar misconduct in the future.
- Unsuitable Mergers and Acquisitions – Derivative lawsuits may challenge proposed mergers or acquisitions, particularly when directors and officers fail to properly evaluate a proposed transaction. Directors and officers may have breached their fiduciary duties if a deal fails to maximize shareholder value.
- Other Breaches – Shareholders may file derivative lawsuits if a company’s executives fail to address violations of environmental regulations, wage and hour laws, workplace safety guidelines, or other state and federal rules and regulations.
The Benefits of a Shareholder Derivative Lawsuit
A successful shareholder derivative action can lead to meaningful corporate-governance reforms, prevent future wrongdoing, and increase shareholder value. A shareholder who prevails in a derivative lawsuit may receive an incentive reward, which is designed to compensate the plaintiff for the time and inconvenience associated with the lawsuit.
Experienced Derivative Lawsuit Attorneys
If you are a shareholder and believe that officers and directors have breached their fiduciary duties, we can help to protect your investment by pursuing a shareholder derivative lawsuit. Due to the number of plaintiffs typically involved, these lawsuits may be complicated and emotionally charged. We will take the time to explain all of your rights and help you navigate the system. Our team at Ajamie LLP has a proven track record of successfully handling derivative lawsuits and class actions. Contact our office to schedule a consultation.
Representative Matters:
- Settled for $79 million a federal court class action lawsuit against Wells Fargo & Company on behalf of its former financial advisors who were wrongfully forced to forfeit their deferred compensation when they left the company.
- Securing the complete dismissal of a corporate officer in a class action litigation alleging claims under ERISA and federal securities laws
- Representing ERISA plan participants in an action against BP
- Representing several investors in securities class action litigation
- Winning the dismissal of 21 consolidated class action lawsuits filed in federal court against former officers of a New York Stock Exchange listed client alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
- Successfully representing tens of thousands of overseas agricultural workers in litigation brought in United States courts for injuries arising from exposure to pesticides banned in the United States
- Advising a class of Texas purchasers of workers’ compensation insurance in overcharge litigation, yielding settlements refunding the illegal overcharges
- Successfully representing thousands of users of the diet drug combination Fen-Phen in cases brought across the country.