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What is a shareholder derivative action?

As a shareholder, you may keep a close eye on the performance of the company in which you invested. You expect its directors, officers and board to meet their duties and obligations to the company and to you.

If you discover this isn't happening, you may speak up and find yourself in a dispute with the corporation. Fortunately, one of your rights as a shareholder is to sue an officer and/or director of the company who you believe is causing it harm through some sort of wrongdoing such as mismanagement.

Should you file a derivative action?

Answering that question requires an understanding of what a shareholder derivative action is and entails. Instead of filing a lawsuit as an individual, you could file on behalf of the interests of all of the company's shareholders and the corporation itself. You must own stock in the company at the time of the alleged wrongdoing, and perhaps even through the end of the litigation, in order to bring such an action against the parties believed responsible. Before you can consider filing such an action, you must show the following:

  • You let the company's management know in writing of your concerns and complaints.
  • The directors failed to take any action.
  • Management failed to resolve the issues.
  • Management's conduct caused harm to you, the other shareholders and the company.

You will need to notify the other shareholders of the derivative action so they can join in the lawsuit if they so choose. Any restitution resulting from a successfully litigated claim does not go directly to the shareholders. Instead, it goes to the company. However, the corporation will compensate you for your legal expenses. This is just one way that shareholders take an active role in the corporations in which they invest.

You could also take an active role in the governance of the corporation through voting and other measures. If you have an issue with a company in which you invest, you could take your concerns to an experienced attorney to explore your rights and legal options when it comes to protecting your investment. In some cases, litigation does not have to be the first course of action. The only way to know is to take advantage of the legal resources at your disposal here in Arizona.

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