Securities Litigation in North Carolina and South Carolina
“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.
Shareholder Derivative Suits
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.
Distinguishing Between a Direct Shareholder Suit and Derivative Litigation
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:
- Assertion of voting rights
- Actions to compel payment of dividends
- Legal efforts to obtain access to corporate books and records
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.
Actions that May Give Rise to Derivative Suits
While any breach of the directors’ and officers’ fiduciary duties can give rise to a derivative suit, some common claims involve:
- Mismanagement of funds
- Accounting irregularities
- Allegations of waste
- Merger and acquisition considerations
- Excessive executive compensation
- Conflicts of interest
- Compliance issues
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.
Standing for Shareholder Derivative Suits
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 plaintiff must have been a shareholder at the time of the alleged misconduct or omission, or have become a shareholder through a particular type of transfer from a person who was a shareholder at that time; and
- The plaintiff must fairly and adequately represent the interests of the corporation in enforcing the rights of the corporation
Shareholder Derivative Litigation Prerequisites in South Carolina
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.
North Carolina Shareholder Derivative Litigation Prerequisites
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:
- Make a written demand on the corporation to take appropriate action; and
- Wait at least 90 days from the date of the demand, unless
- The shareholder is notified that the corporation has rejected the demand; or
- Irreparable injury to the corporation would result from the delay
Remedies in a Shareholder Derivative Suit
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.
Shareholder Class Actions
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:
- The negotiation of mergers and acquisitions; and
- When investors have been defrauded
In such cases, the suit is filed on behalf of the shareholders themselves, not the corporation, and recovery is sought for investor losses.
Shareholder Suits Are Complicated
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.
For a free case evaluation, please contact us. We can be reached online or by phone at (704) 307-4350.