“Securities litigation” refers to a broad range of legal matters, ranging from defending against Securities and Exchange Commission (SEC) actions to shareholder derivative suits and shareholder class actions. Although SEC regulations are federal, corporate law differs from state to state. That means different jurisdictions may have differing rules regarding standing to file a shareholder suit, and may set forth different procedures that must be followed before the suit is commenced, in the filing of the action and during litigation.
A shareholder derivative suit may be filed when a shareholder of a corporation has evidence that one or more officers or directors of the corporation are acting in a manner that is detrimental to the corporation. The basis of the suit is not individual harm to the shareholder, although the shareholder may be suffering damages due to the alleged improper actions. Instead, the shareholder intervenes on behalf of the corporation itself.
Generally, the shareholder must attempt to address the issue with the directors or other corporate authorities before proceeding to filing a derivative suit. The exact requirements regarding efforts to resolve the problem pre-litigation differ from state to state.
In contrast to the protection of corporate interests as described above in connection with a shareholder derivative suit, a direct shareholder action asserts rights of the shareholder, or seeks compensation for damages suffered directly by the shareholder. Some examples of direct shareholder actions include:
In short, the shareholder’s damages must be direct and not incidental to some harm to the corporation. Thus, a breach of the shareholder agreement by the corporation would typically give rise to a direct claim, whereas excessive executive bonuses might form the basis for a derivative suit.
While any breach of the directors’ and officers’ fiduciary duties can give rise to a derivative suit, some common claims involve:
Generally, an individual shareholder has no standing to sue the breaching officers or directors directly, since the direct harm is to the corporation and not to the shareholder. However, a derivative suit allows a properly-situated shareholder to stand in for the corporation and demand restitution or other remedies on its behalf.
In both North and South Carolina, a shareholder must fulfill two requirements in order to bring a derivative suit on behalf of the corporation:
The South Carolina Rules of Civil Procedure (SCRCP) required that a plaintiff filing a shareholder derivative suit include in the pleading a description of any efforts made to “obtain the action he desires from the directors or comparable authority, and, if necessary, from the shareholders or members.” If such an effort has not been made prior to filing, the plaintiff must explain why.
A North Carolina statute (North Carolina General Statutes § 55-7-42) sets forth much more specific requirements for a shareholder leading up to filing a derivative suit. In North Carolina, the shareholder must:
A shareholder derivative suit is filed not for the benefit of the individual shareholder, but to protect the interests of the corporation. Thus, when a derivative suit is successfully settled or the shareholder plaintiff prevails at trial, the award is for the benefit of the corporation rather than the individual shareholder.
Once a shareholder derivative suit is filed, the plaintiff cannot dismiss the case and the parties cannot enter into an effective settlement agreement without leave of court.
Although damages in a derivative case are awarded for the benefit of the corporation, the successful shareholder plaintiff is generally entitled to attorney fees associated with prosecution of the case and the assertion of the corporation’s interests.
Directors and officers of corporations have a fiduciary duty to maximize value for shareholders. However, that duty sometimes comes into conflict with the leadership’s own interests. When corporate authorities take actions detrimental to the shareholders as a group, a class action may be the most appropriate remedy.
Two common areas in which shareholder class actions arise are:
In such cases, the suit is filed on behalf of the shareholders themselves, not the corporation, and recovery is sought for investor losses.
Both shareholder derivative suits and shareholder class actions are, for different reasons, very complex. A shareholder who is considering filing an action on behalf of the corporation or the shareholders must ensure that he or she has adequate evidence to support the filing of the claim, that the shareholder is properly positioned to represent the interests of the corporation or the class or shareholders, and that all pre-filing obligations have been fulfilled.
Working with an experienced securities litigation attorney can help ensure that the shareholder has properly assembled evidence before filing, and that the case is not dismissed for failure to fulfill the pre-filing notice and other requirements.
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