A company’s shareholders have a big stake in the company’s success, and they have the right to question whether or not the company’s directors, officers and management are actually upholding their fiduciary duties.
When shareholders suspect that a company’s directors or management have engaged in some kind of misconduct, they can take legal action. This primarily comes through direct and derivative shareholder lawsuits.
Direct shareholder lawsuits
A direct shareholder lawsuit, which can be filed by an individual shareholder or a group of shareholders, alleges that the shareholders themselves have suffered direct harm. These lawsuits seek to compensate the shareholders for their losses or enforce shareholder rights.
Typically, causes of action include allegations that the shareholders’ rights have been oppressed in some way. Manipulation of dividends, the lack of transparency with the company’s financial statements, conversion of property related to shareholder stocks and breaches of the shareholder agreement are also common reasons for direct suits. If successful, any damages awarded in these direct suits typically go directly to the shareholders involved.
Derivative shareholder lawsuits
In comparison, derivative suits are filed by a shareholder or shareholders on behalf of the company itself. In these lawsuits, the shareholders act as representatives or watchdogs for the corporation’s interests, and the lawsuits may aim to force a course correction or recover damages on behalf of the company as a whole.
Typically, causes of action include corporate waste, gross mismanagement of the company’s resources or assets, fraud, insider trading, conflicts of interest or breaches of fiduciary duty by the corporate officers or directors. They’re called derivative lawsuits because the harm to the shareholders is indirect – and so is their recovery. If a suit is successful, all shareholders typically benefit equally through the positive effect on the corporation’s shares or market value.
Both of these kinds of lawsuits play a pivotal role in protecting shareholder rights and holding corporate executives accountable for their actions. Direct lawsuits simply safeguard individual stakeholders, while derivative lawsuits look after the well-being of a company and all its stakeholders.