Shareholder Options for Curbing Business Mismanagement

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Shareholders exercise very limited managerial rights over a corporation. Nevertheless, shareholders represent the true owners of the business and the powers that directors and officers wield ultimately flow from them. For this reason, it can create a difficult situation when the corporate leadership appears to break away from the shareholders and ceases to live up to the fiduciary duties imposed upon them. While in many cases, the simple solution is for the shareholders to simply vote out the current directors, in more extreme and urgent cases, legal action may be necessary.

The shareholder derivative action is one such option. Existing in most jurisdictions in the U.S. and codified under Chapter 8 of the California Corporations Code, this type of lawsuit allows a shareholder to sue the corporate leadership on behalf of the corporation. Such a lawsuit can compel the directors to act in the best interests of the company and may even recover monetary compensation payable to the corporation for damages caused by the leadership’s breach of fiduciary duty.

In order to institute a derivative action, a person must meet two essential criteria:

  • The plaintiff must have been a record shareholder at the time the transaction or conduct which is the basis of the action occurred. Under some circumstances, a shareholder who acquired shares subsequent to the misconduct but before it was disclosed may also qualify.
  • The plaintiff must have made a demand upon the board of the corporation to take ameliorative action and the board has refused.

A derivative action can be a complex process that should not be taken lightly. However, it is important for California investors to know they do have options and should consult an experienced corporate litigation attorney when the leadership of the companies in which they hold stakes fails to represent their interests.

Posted in Business Law | Tagged business management, california corporations code, derivative action