Common Issues in Derivative Lawsuits

When you invest your money in a company, you expect a positive return on your investment. Unfortunately, that is not always the case. A corporation may suffer harm for a variety of reasons, which can cause a shareholder’s investment to become risky. South Carolina and federal laws give shareholders certain rights they can exercise to protect their investment in a corporation, including the right to file a derivative lawsuit. A South Carolina corporate lawyer may advise a shareholder to file a derivative lawsuit for a variety of reasons.

What Is a Derivative Lawsuit?

Before we look at some common issues that may give rise to a derivative lawsuit, it may be helpful to review a short explanation of derivative lawsuits.

A derivative lawsuit is an action filed by a current shareholder on behalf of the corporation. The corporation had the right to file the lawsuit, but for some reason, the directors and officers of the corporation chose not to file the lawsuit to pursue a valid legal action. In the lawsuit, the shareholder is pursuing a claim against a third party for harm sustained by the corporation.

What Are Common Issues That Give Rise to a Derivative Lawsuit?

In many cases, derivative lawsuits are filed by shareholders against the corporation’s officers or directors for misconduct that harmed the company. For example, a derivative suit may allege the directors or officers breached their fiduciary duty, corporate waste, fraud, proxy violations, excessive compensation and benefits for officers, misappropriation of corporate opportunities, and other wrongdoing.

However, a derivative lawsuit may also be filed against other third parties when the directors and officers refuse to act in the corporation’s best interest. In some cases, a shareholder may file a derivative lawsuit against accountants, financial advisors, and other parties who may have harmed the company.

South Carolina Requirements for Filing a Derivative Lawsuit

Shareholders can only bring a derivative action in South Carolina under certain circumstances. In order to have the standing to file a derivative lawsuit on behalf of a corporation, a shareholder must:

  • Have owned his or her shares when the alleged illegal activity or wrongdoing occurred. The shareholder may have purchased the shares before the alleged event or received the shares from another shareholder who owned the shares at the time of the alleged event;
  • Represent the best interests of the corporation; and,
  • Attempt to resolve the matter directly with the corporate directors and officers outside of court. The complaint filed by the shareholder must include a detailed explanation of the efforts made by the shareholder to resolve the situation with the corporation. If the shareholder did not make any efforts to resolve the matter outside of court, the complaint must explain why no efforts were made to settle the matter before filing the lawsuit.

Contact a South Carolina Corporate Attorney for More Information

Corporation law can be complex and challenging, especially when it relates to shareholder rights. If you have questions regarding misconduct by officers and directors of a corporation, contact a South Carolina corporate attorney to discuss your legal rights, including a derivative action.