Key Takeaways

• A derivative suit is brought by a shareholder on behalf of the company against the directors or officers who harmed it. Any money recovered goes to the company, which benefits all shareholders.
• You generally must have owned shares when the misconduct happened and must keep them while the case is pending.
• Most states require a written demand on the board before suit, or proof that a demand would be pointless.
• Merger challenges and appraisal claims have short, fixed deadlines tied to the shareholder vote. Act before the vote, not after.

Shareholder Derivative Suits

A corporation can only act through its board. When the board members are the ones who caused the harm, they are unlikely to have the company sue themselves. The derivative suit solves that problem. A shareholder steps into the company’s shoes and brings the claim the company should have brought. Typical claims include:

• Self-dealing transactions between the company and its directors, officers or controlling shareholder.
• Excessive or unearned executive compensation.
• Failure to oversee the business, such as ignoring red flags of illegal conduct that later cost the company fines or judgments.
• Insider trading by executives on information the public did not have.
• Waste of corporate assets.

A successful derivative case can return money to the company, recover pay from executives and require changes in how the company is governed, such as new independent directors, stronger internal controls and changes to compensation policy.

Before You Can Sue: Ownership and Demand

Derivative suits have rules that ordinary lawsuits do not. You generally must have been a shareholder at the time of the wrong and must remain one through the case. Before filing, most states require the shareholder to send the board a written demand to take action. Pennsylvania generally requires a demand before suit. Other states, including Delaware, excuse the demand when the shareholder can show with specific facts that the board could not fairly consider it. Which state’s law applies depends on where the company is incorporated, not where you live.

Books and Records Demands

Shareholders have a right to inspect a corporation’s books and records for a proper purpose, such as investigating suspected mismanagement or valuing their shares. A books-and-records demand is often the first step. It lets you see board minutes and other internal documents before deciding whether to bring a case, and courts expect shareholders to use it. If the company refuses, a court can order the records produced.

Merger and Acquisition Litigation

When a company is sold, the board must act in the interest of the shareholders, not of management or a controlling owner. A merger case may be warranted when:

• The price is unfair compared with the company’s value.
• The sale process favored one bidder or shut out others.
• Directors or executives stand to receive benefits that ordinary shareholders will not.
• A controlling shareholder is buying out the minority.
• The proxy statement leaves out information shareholders need to vote.

Before the deal closes, a court can order corrected disclosures or halt the vote. After closing, shareholders can seek damages. In many cash mergers, a shareholder who believes the price is too low may also demand appraisal, in which a court determines the fair value of the shares. Appraisal has strict steps. In general, you must deliver a written demand before the vote and must not vote in favor of the merger.

Closely Held Companies

These rights are not limited to public companies. A minority owner of a family business or a private corporation can bring derivative claims and claims for oppression when the majority freezes the minority out, diverts business or pays itself at the minority’s expense. See our commercial litigation page for partnership and ownership disputes.

What Our Firm Does

• Review the company’s public filings and your shareholding to see whether you have standing to sue.
• Prepare and serve books-and-records demands and enforce them in court.
• Draft the demand on the board or the showing that demand is excused.
• Bring derivative, merger and appraisal claims in the proper court.
• Negotiate governance changes as well as money.

Who We Help

• Long-term shareholders of public companies.
• Minority owners of private and family corporations.
• Trustees, executors and retirement plans that hold shares.
• Shareholders facing a merger vote who believe the price or the process is unfair.

Frequently Asked Questions

What is the difference between a derivative suit and a class action?

A class action is brought for investors who were personally harmed, usually because they bought stock at an inflated price, and the money goes to them. A derivative suit is brought for the company, and the money goes to the company. The same misconduct can give rise to both.

Do I personally receive money from a derivative suit?

Not directly. The recovery goes to the corporation, which increases the value of every shareholder’s stake. The case can also produce governance changes that protect your investment going forward.

I only own a small number of shares. Can I still bring a claim?

Yes. There is generally no minimum number of shares. What matters is that you owned shares when the misconduct occurred and that you continue to hold them.

A merger was just announced and I think the price is too low. What should I do?

Do not vote or tender your shares until you have advice. Appraisal rights and other claims can be lost by voting in favor or by missing a deadline that falls before the shareholder meeting. Email us with the merger announcement.

Which court hears these cases?

It depends on where the company is incorporated and on its bylaws, which often name the court where shareholder suits must be filed. Many public companies are incorporated in Delaware. We determine the proper court before anything is filed.

Talk to Us About Your Rights as a Shareholder

Email msiddons@siddonslaw.com with the name of the company, when you bought your shares and what concerns you. We will reply with the list of documents we need and the deadlines that apply.