Shareholders of a company that are concerned about the conduct of its officers or directors can take legal action. They may file a shareholder derivative lawsuit to protect the interests of shareholders. A number of high-profile companies have faced such lawsuits in recent years, including Boeing, Alphabet, and Victoria’s Secret.

The requirements for bringing a shareholder derivative claim depend on the laws of the state where the corporation is incorporated. However, most states have similar substantive and procedural requirements. The shareholder plaintiff must first establish that they have standing to bring the lawsuit. A shareholder may commence a derivative proceeding if they were a shareholder at the time the action is commenced and at the time when the conduct giving rise to the action occurred.

In shareholder derivative lawsuits, the shareholder plaintiff must generally make a pre-suit demand upon the company’s board of directors. This demand is a formal written request sent to the board asking them to provide internal documents that would help the shareholder evaluate the alleged wrongdoing. The board of directors must be given a reasonable amount of time to respond to the demand, typically at least 90 days.

The filed complaint must state whether the shareholder made a demand on the board of directors to obtain the desired action. Alternatively, the plaintiff can state the reasons why making such a demand would be futile. For example, if a majority of the directors participated in the conduct that allegedly harmed the corporation, the plaintiff could argue that the board would be unable to fairly evaluate the demand.

A special litigation committee (SLC) may be appointed, which is a group of disinterested directors tasked with assessing the shareholder derivative claim. Based on the committee’s evaluation, they will make a recommendation as to whether settling or dismissing the case is in the best interests of the company.

Once the complaint is filed with the court, the company defendant may file a motion to dismiss. In order for the shareholder plaintiff to survive a motion to dismiss, the lawsuit must sufficiently establish that the company’s directors or officers breached a fiduciary duty to shareholders. Many business decisions made by directors and officers in good faith and with due care are shieled from liability under the business judgment rule.

A shareholder derivative lawsuit is distinguishable from a direct shareholder claim. In a direct shareholder action, the shareholder must allege with particularity that they personally suffered an actual or threatened injury. In a derivative shareholder action, the company itself allegedly suffered the harm.

Many large corporations have faced shareholder derivative lawsuits, highlighting the importance of understanding the intricacies of this litigation. For example, a shareholder derivative lawsuit was brought against Boeing’s directors and executive officers in connection with safety issues with the Boeing 737 Max. The plaintiffs alleged that Boeing failed to impose adequate safety measures and risk management processes in the years leading up to the

problems. Boeing ultimately secured a dismissal of the lawsuit in the Delaware Chancery Court, but the company devoted significant time and resources to fighting the lawsuit.