The Law Offices of Sanford F. Young, P.C.

Getting results since 1978

What is a derivative action lawsuit?

On Behalf of | Apr 13, 2023 | Business Litigation

Corporation shareholders in New York may file a derivative action lawsuit in the event of a breach of fiduciary duty or other wrongdoing within a corporation. The derivative action lawsuit is filed against a director or officer of a corporation, but the lawsuit is on behalf of the corporation. The shareholders file the lawsuit because the officer or director has done something detrimental to the corporation.

The objective of a derivative action lawsuit

A derivative action lawsuit is a form of business litigation that addresses wrongdoing done within a corporation. If damages are recovered, they belong to the corporation and not the shareholders who filed the lawsuit. But the shareholders receive an indirect benefit because they hold shares in the corporation.

Taking a derivative action against a corporation

The shareholders must request that the corporation’s board of directors take action against the person or people doing the wrongdoing. If they agree to do so, the shareholders can stop here and not file the lawsuit. But if the board refuses to do anything about the wrongdoing, the shareholders can move forward and file the derivative action lawsuit.

Benefits of a derivative action lawsuit

The ability to file a lawsuit means that shareholders can hold corporation directors and officers accountable for their actions. The lawsuit is also useful if the board of directors refuses to act in the best interest of the shareholders or the corporation. The derivative action lawsuit gives shareholders the power to get help outside of the corporation and the board of directors.

Holding a corporation accountable

Shareholders can file a derivative action lawsuit to rectify the wrongdoing within a corporation. The lawsuit is powerful because it holds corporations accountable and provides a voice for shareholders.