Shareholder derivative suits are one means of keeping corporations’ management teams accountable to their companies and their shareholders. While there is certainly an important place for this in the American legal system, these lawsuits are often complex, and can quickly become unwieldy and costly for both plaintiffs and defendants. This is why many companies use directors and officers insurance to help protect against the expenses of these suits.
What is a Shareholder Derivative Suit?
A shareholder derivative suit is a legal action initiated by a shareholder. It is called a derivative suit because it is brought on a corporation’s behalf, and the defendant is a third party. Often, the defendants are the company’s own chief executive officer or a board member. These legal gymnastics are required because traditional corporate law dictates that legal actions involving corporations should be the responsibility of its management team; since members of these teams are unlikely to bring suits against themselves, derivative suits are used to hold executives and directors accountable.
Types of Shareholder Claims
There are a number of reasons that shareholders may choose to bring a lawsuit. Legal actions that name directors as plaintiffs are often based on a breach of fiduciary duty, which involves three aspects:
- Good faith
- Due care
Shareholder lawsuits are often very expensive, and many businesses choose to have directors and officers insurance to ensure they will not have to endure too great of a loss from legal fees in the face such a legal claim.