Dunn Lambert, LLC
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Comprehensive legal services for businesses in New Jersey and New York call 201-957-0874
Dunn Lambert, LLC
comprehensive legal services for businesses call 201-957-0874

What you need to know about shareholder derivative actions

Owning your own company may have been a lifelong dream. When you chose to form your business as a corporation, you knew you would take on shareholders.

They have responsibilities to your company, but you also must extend them certain rights. One of those rights allows your shareholders to keep an eye on the company, along with what you do with it.

Understanding your shareholders

The law provides shareholders with certain rights, but also with certain responsibilities and duties, such as those listed below:

  • They own a portion of your company.
  • They can transfer their ownership rights.
  • They deserve to receive dividends from the corporation.
  • They may have the right to vote on issues that affect the company.
  • They can file a lawsuit against a board member, director or officer of the corporation they believe has harmed it in some way.

The lawsuits filed by shareholders are derivative actions. These differ from other lawsuits in that one shareholder files the case on behalf of the corporation and represents all of the shareholders' interests.

What requirements must the shareholder meet before filing?

Not just any shareholder can file a derivative action. In order to do so, he or she must meet some minimum requirements:

  • Ordinarily, the shareholder must own stock in the company at the time of the alleged transgression and throughout the ensuing litigation, or until it settles, whichever comes first.
  • You have the right to notice of the shareholders' concerns regarding problems with management or some other matter that could jeopardize the company's future.
  • If you don't comply with the notice, they will then need to show that your actions somehow harmed their interests. They must also show that you refused to work to fix the problems they believe exist.
  • The first shareholder must notify the other shareholders of the lawsuit to give them the opportunity to join it.

If the shareholders prevail in their legal action against you, the company is the one that benefits from any court-awarded damages. However, the court may order your corporation to pay the legal expenses.

Even if you made mistakes as the owner of the corporation, that does not necessarily mean that you deserve to go through litigation to "prove" that you didn't properly care for their or the corporation's interests. It may be possible to find a resolution that satisfies all parties between when you receive the notice and when the shareholder would file the lawsuit. Doing so could save you, your company and your shareholders from time-consuming and expensive litigation.

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