Corporations are complex entities that involve many conflicting interests. Sometimes these internal tensions can cause corporate officers to act in ways that harm the company. In such a situation, shareholders aren’t helpless. They may be able to bring legal action against corporate decision-makers to stop their destructive behavior.
The following five steps will help stakeholders take action against company officers:
Ensure you qualify to file suit
Legal actions against corporate officers brought by shareholders are called shareholder derivative actions. To file such a suit, you must meet the ownership requirements under state law and the corporation’s bylaws, which often specify a minimum percentage of shares needed to file a derivative action.
In many jurisdictions, you must first send a demand letter to the company’s board of directors. This document will explain the alleged wrongdoing and request that the board take corrective action. If the board fails to respond within a reasonable time frame, you may proceed with the lawsuit.
You need to file a complaint with the appropriate court. The complaint will detail your allegations against the company officer(s) and ask for a remedy.
Once you file a complaint, this type of business litigation will involve multiple stages. The process ensures both sides will have the opportunity to present evidence and make arguments on their behalf.
A shareholder derivative lawsuit will be resolved through either a: 1) judgment at trial or 2) a settlement. The parties can often reach an agreement through negotiation before reaching a trial. Settlements can happen at any point in the process.
Parties involved in a shareholder derivative action should monitor the proceedings. Don’t just leave the action in the hands of legal counsel. While a derivative suit can be a difficult journey, it allows shareholders to prevent corporate misconduct.