California Derivative Action Defense Lawyer

A derivative action lawsuit occurs when a shareholder sues on behalf of a corporation. The shareholder is representing the corporation and its rights because the management of a corporation refuses to do so. The corporation, not the shareholder, is entitled to the resulting damages. Any damage or injury to the corporation’s property means the corporation can seek legal action. Therefore, if a shareholder brings a case for the destruction of the corporation’s property, it must be on behalf of the corporation. In this page, our experience California derivative action lawyer will explain how a California derivative action works.

Necessity of Shareholder’s Pre-Lawsuit Demand to the Board of Directors

In order for a shareholder to file a derivative action lawsuit, the shareholder must first demand that the corporation’s management file a claim. The law requires the shareholder to make reasonable attempts to assist the corporation in suing before seeking derivative action. An exception is made if this would be a futile demand, for example, if the corporation’s directors were the wrongdoers.

The corporation’s directors must be given a chance to correct the wrong. For example, if the company’s accountants are allegedly committing malpractice, the shareholder must demand the directors sue the accounting firm. However, if the shareholder can prove that the demand is futile because the company’s directors benefited from the malpractice, then they can skip this step. If a shareholder makes a demand, it is critical that your company contact a California derivative action lawyer for tactical moves and documentations.

The shareholder files a derivative action and posts a bond

When the shareholder makes a demand of the board, the board has a responsibility to correct the issue. If they do not address the issue, then the shareholder has grounds to file a derivative action lawsuit.

If the board addresses the shareholder’s demand but decides not to act, then the court will determine if the shareholder can continue with the derivative action.

In California, the shareholder must post a bond of $50,000 during this step. The bond will be used to cover the corporation’s litigation costs if the shareholder does not win the action.

The court determines whether the board’s refusal was rational

Upon hearing the shareholder’s case, the court will evaluate what has happened up to that point. If the refusal of the shareholder’s demand was not biased and was in good faith, then any reasonable and rational decision will be upheld. However, if there is doubt that the board is unbiased or acting in good faith, then the court may allow the derivative action to proceed.

The shareholder must demonstrate that the board’s decision was not independent

There may be many reasons for the board’s decision, but if the shareholder can show that the board’s decision was “contaminated” or biased, then they have a case. For example, if the shareholder’s demand was to sue the Chairman of the board, but the board denied the request. Showing that the other board members are relatives and regularly vote in line with the Chairman shows contamination.

Showing evidence of the board’s contamination or lack of independent decision will strengthen the shareholder’s derivative action.

The court makes its final decision

Court rulings vary widely in derivative action lawsuits. If the shareholder wins the derivative action, the court will lay out steps the board must take to correct the company damage. If the company wins, the shareholder’s bond will cover the company’s litigation costs.