Shareholder Lawsuits: Should You File a Direct Claim or a Derivative Claim?

As a shareholder in a publicly-traded or privately-held corporation, your top priority should be protecting your investment. The value of your shares is directly related to the corporation’s profitability, and you need to feel confident that the people who are in control of the company (its officers, directors and majority shareholders) are acting with your best interests in mind.

Of course, this does not always happen. There are many well-known cases (and far more lesser-known cases) of corporate officers, directors and majority shareholders taking advantage of their positions for personal gain. From self-dealing and conflict-of-interest transactions to cases of corporate waste and accounting fraud, there are many ways that those who are in control of a corporation can misuse and abuse their autonomy. Fortunately, as a shareholder, the law protects you, and there are potentially two different ways that you can assert your legal rights.

Shareholder Derivative Claims: Taking Action on Behalf of the Corporation

The first option is to file what is known as a shareholder derivative lawsuit. This is a lawsuit that you file on behalf of the corporation, not in your personal capacity as an individual shareholder. Essentially, you are standing up for the corporation, claiming that misconduct by the company’s board or management has resulted in harm to the corporate entity. As a result, if a derivative lawsuit is successful, any damages will be awarded to the corporation rather than you personally (in shareholder derivative litigation, it is possible to seek other remedies such as removal of directors and officers as well).

Direct Shareholder Lawsuits: Seeking to Recover Your Investment Losses

The second option is to file a lawsuit as an individual shareholder. If the Board of Directors, the company’s executive leadership, or its majority shareholders have engaged in misconduct that has resulted in the deterioration of the value of your shares, you may be entitled to file a claim for damages. Similar to shareholder derivative claims, the potential grounds for filing a direct lawsuit are numerous as well, ranging from illegal acts by individual directors and officers to decisions made on behalf of the company that result in regulatory enforcement or litigation. However, unlike shareholder derivative litigation, if you succeed in filing a direct lawsuit, then any damages will be awarded to you personally as compensation for your shares’ loss of value.

Which Option Should You Choose?

So, which option should you choose? While it may seem best to file a direct lawsuit since this will result in you personally receiving financial compensation (if your claim is successful), there are a number of reasons to choose a shareholder derivative lawsuit under appropriate circumstances. Additionally, for certain types of claims (such as breach of fiduciary duty), shareholders can only file in a derivative capacity. Are you concerned about your investment as a corporate shareholder? If so, we encourage you to contact us for a complimentary initial consultation.

Speak With a Shareholder Derivative Litigation Attorney in Confidence

Our attorneys represent clients nationwide in shareholder derivative lawsuits and direct litigation against corporate officers, directors and majority shareholders. If you have questions and would like to speak with an attorney, please call 212-742-1414 or contact us online today.