Spotlight: defending against shareholder derivative actions

Here’s a real-life scenario that sometimes plays out for corporations in California and elsewhere across the country.

Imagine that you are a business executive and part of a key management team in a corporation. You are routinely tasked with making important decisions that guide the business and centrally determine its vision and forward-looking strategies.

As such, you and other high-ranking principals routinely exercise business judgment that you have cultivated and progressively honed. That acumen has well served corporate interests in the past, and your thinking is that it will continue to benefit shareholders going forward.

Imagine further, though, that not all shareholders subscribe to your view. In fact, a number of them have banded together in what is essentially a class action lawsuit that targets you and other key decision makers for malfeasance that is harming the corporation. Because the corporate entity itself is not taking action to defend its interests, the shareholders are doing so via a shareholder derivative lawsuit.

Such filings are not uncommon in the business world, their central thrust being action that is taken on behalf of the corporation for alleged mismanagement of business officers. An article on such lawsuits calls them the “final weapon in the arsenal of the shareholders.”

Understandably, derivative actions can be complex and entail a large degree of subjectivity that needs to be judicially waded through. Often, key analysis focuses on a corporate team’s aforementioned business judgment and whether it was sufficiently displayed to safeguard corporate officers from liability.

Company officials defending against a derivative action have a lot to think about. A proven business and commercial law firm can help them contest such an action and prepare a case that justifies their conduct as necessary or otherwise protected as a matter of informed business judgment.

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