Shareholder Litigation

Shareholders of a corporation have a right to bring a claim either on their own or on the behalf of the corporation to right wrongs by the corporation, officers, and/or directors.

What is a Direct Suit?

A shareholder can bring a direct suit against the corporation, officers, directors, or both for harms suffered by the shareholder. Under Tooley v. Donaldson, Lufkin, & Jenette, Inc., a direct shareholder action requires the injury to be independent from any alleged injury to the corporation. The Tooley test considers two questions: (1) who actually suffered the harm? and (2) who receives the benefits if judgement is rendered? The shareholder plaintiff must show that their claim can prevail absent a showing of harm to the corporation.

What is a Derivative Suit?

A derivative suit is brought by a shareholder on behalf of the corporation to enforce the corporation’s rights. To initiate a derivative action, the plaintiff must have standing. Typically, this means the shareholder plaintiff must own the corporation’s stock at the time of the incident and throughout the litigation.

The second requirement is known as the “demand requirement.” Procedural requirements vary by jurisdiction but generally fall within two options. The first option is the universal demand option, which the Model Business Corporation Act (“MBCA”) follows. The universal demand approach requires a shareholder plaintiff to provide written notice to the corporation requesting that it take action against the alleged issue before filing a derivative action. The shareholder plaintiff must then wait 90 days after the written request to bring suit, unless the corporation rejects the request or waiting the full 90 days would result in serious harm to the corporation. If the corporation agrees to take action the shareholder’s right to initiate litigation ends.

The second option is the Delaware approach. Del. Ch. R. 23.1 states that the shareholder plaintiff must either make a demand to the board before filing suit or plead facts showing that the demand requirement should be excused due to conflict or lack of independence that renders the board incapable of making an impartial decision regarding the litigation.

Therefore, the shareholder plaintiff can either make a pre-suit demand or plead facts arguing that the demand is futile. If the board refuses the demand, the business judgement rule creates a presumption that the board acted in good faith and that the action was taken in the best interest of the corporation.

If you have any questions or want assistance with information relating to direct and derivative suits, please reach out to one of our attorneys at McNeelyLaw LLP by calling (317)825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.