Shareholder Derivative Suits

A Shareholder Derivative Suit is a civil lawsuit filed by shareholders on behalf of a corporation asserting rights of the corporation in the absence of corporate action to protect such rights; also a suit by shareholders to enforce corporate rights against directors or other insiders. The standing of shareholders to sue is derived from the rights of the corporation. This differs from a class action (or representative suit), where a large group of plaintiffs (shareholders or otherwise) bring suit in their own right. These lawsuits are becoming increasingly common and at the same time they are becoming more risky. In most cases they are brought by an existing shareholder on behalf of the company against the officers and directors of the company and they allege breach of fiduciary duty. Such suits come in two basic varieties: those that accompany class actions and those that are free-standing. These two types require very different approaches.

The Tag-Along Suits

Most class actions now have at least one derivative suit (as a tag-along suit). In 1998, Congress passed the Securities Litigation Uniform Standards Act ("SLUSA") to close a loophole in the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which allowed plaintiffs' lawyers to file national securities class actions in state courts. The SLUSA essentially makes federal court the exclusive jurisdiction, and federal claims the exclusive claims, permitted for large-scale shareholder class actions. However, SLUSA does not preempt shareholder derivative actions. (This exemption is commonly referred to as the "Delaware carve-out.") As a result there has been an increase in the filing of state tag-along derivative suits in securities cases.

The derivative action is often handled by a different plaintiff's counsel, who likely failed to be appointed lead counsel in the federal class action. Usually the derivative suit is not subject to the automatic discovery stay provisions of the PSLRA.

The Stand-Alone Suits

The stand-alone suits can allege a wide variety of problems, including: Breach of fiduciary duty; Excessive officer compensation; Proxy violations; Option plan violations; Related party transactions; Misappropriation of corporate opportunities; Corporate waste. These are the suits that Trautmann and Associates, LLC focuses on. It is widely acknowledged that corporations and their boards today largely ignore the individual shareholders and care only about lining their own pockets at the expense of the shareholder. If you feel that a corporation in which you are a stockholder has taken actions that are contrary to your best interests we welcome the opportunity to discuss the matter with you.

Finally, we welcome your inquiries on these matters. Send your questions or comments to GDT@Trautmann.com.