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An overview of shareholder derivative lawsuits

Cornell University Law School’s Legal Information Institute explains that when a corporation has a valid legal complaint that it refuses to exercise, shareholders may pursue litigation on the corporation’s behalf. This is known as a shareholder derivative lawsuit.

The Federal Rules of Civil Procedure set out the guidelines that must be followed when derivative actions are filed in federal court. These provisions are provided in Rule 23.1, which states that shareholder derivative actions must be initiated by a plaintiff who adequately represents the shareholders’ or members’ interests.

Derivative lawsuits often occur because one of the corporation’s officers or directors breached his or her fiduciary duty. As defined by the LII, a fiduciary duty is a requirement that fiduciaries act in the sole interest of their principals. Officers and directors are considered fiduciaries, and as such they owe a duty of care to their principals (the corporations). This means that officers and directors are not allowed to have a conflict of interest with their corporations or to profit from the existence of their relationship with their corporations.

Damages for shareholder derivative lawsuits follow slightly different rules than other types of civil litigation. The LII explains derivative suits will not result in awards for the shareholder; all damages will be paid to the corporation. In addition, FRCP 23.1 has certain requirements for settlements, dismissals or compromises between plaintiffs and defendants. If the parties wish to resolve their disputes in one of these ways, they must obtain court approval and inform the remaining shareholders of the decision in whatever manner the court orders. 

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