Willcox, Buyck & Williams, PA Blog

Friday, August 25, 2017

Shareholder Derivative Actions Explained

When you invest your hard-earned money in a corporation, you do so with certain expectations.  And in fact, both South Carolina and federal laws place requirements on the corporation’s officers to meet a set of reasonable expectations.  As a shareholder, the law also gives you a certain set of rights to help you protect your interests.  One of those rights is the right to initiate a “derivative action.”  

A derivative action is a lawsuit that is filed by a shareholder on behalf of the corporation when the corporation’s leadership has failed to act.  Although it doesn’t have to be the case, shareholder derivative suits are usually filed when a company’s officers have breached a fiduciary duty or otherwise acted improperly against the company and its shareholders, such as receiving excessive compensation, misappropriating corporate opportunities, or committing corporate waste.  Unlike claims in which a shareholder sues the corporation directly for what he or she considers to be unacceptable losses to his or her investment or for a failure to pay dividends, in a derivative suit the shareholder is suing for the corporation against a third party—usually the corporation’s officers. When this happens, it is essential to call on a business and commercial law lawyer.

Requirements for Bringing a Shareholder Derivative Action in South Carolina

Shareholders stepping in to sue on behalf of a company is an extraordinary measure, and South Carolina law places limits on who can do it and when.  In general, the following are the requirements to have “standing,” or the right to sue, in a shareholder derivative action:

  • The shareholder must fairly and adequately represent the interests of the corporation
  • The shareholder must have been a shareholder at the time the alleged inappropriate or illegal activity occurred, or received his or her shares from a shareholder who was a shareholder at that time (such as through an inheritance)
  • Before bringing a lawsuit, the shareholder must first make efforts to resolve the situation with the corporation directly outside of court, and his or her court filings must state specifically what efforts were made, or else explain why no such efforts were made

Additionally, once a shareholder brings a derivative action to court, he or she is generally obligated to see the action through to the end without settling the case.  The court’s permission is usually required to settle the case or otherwise remove it from the court’s calendar, and other shareholders who could be affected are usually required to be notified.

Corporate law is a vast and complex world, and can often be unfriendly to shareholders and other investors.  If you have a stake in a company, concerns about how your investment is being handled can cause a lot of stress and anxiety.  The best cure for that is understanding exactly what is going on, and what you can do about it.  

Our firm has been practicing corporate law in South Carolina for years, and our attorneys have helped countless shareholders resolve problems concerning their investments.  If you’re worried about how your investments are being handled and would like to speak with an attorney, contact Willcox, Buyck & Williams, P.A. today for a consultation.

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