Court Decides Buy-Out Claims Are Derivative

When a shareholder sues corporate officers and directors, she must decide whether to bring a direct action (which may be a class action) or a derivative suit. The consequence of making the wrong decision may be dismissal of the shareholder’s suit as was the case recently in Sweeney v. Harbin Electric, Inc., 2011 U.S. Dist. LEXIS 82872 (D. Nev. July 27, 2011).

In Sweeney, the plaintiff filed a class action suit when he learned that the board of directors of a Nevada corporation had received a buy-out offer from the corporation’s chief executive officer and an investment fund. The plaintiff alleged breach of fiduciary duty against all of the defendants (except the corporation) and aiding and abetting breach of fiduciary duty against the corporation. U.S. District Court Judge Robert C. Jones granted the defendants’ motion to dismiss finding that the case was a derivative action. In doing so, Judge Jones quoted the following from my treatise...

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