Shareholder Direct and Derivative Actions - Explained
How Shareholders Enforce Their Rights
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How can shareholders enforce their rights?
Shareholders may generally enforce their rights against the corporation (or its officers and directors) in one of two ways - Direct Actions and Derivative Actions.
Next Article: Derivative Action Process Back to: CORPORATE GOVERNANCE
What are Direct Actions by Shareholders?
A shareholder may directly sue the corporation, an officer, or director if one of these individuals takes actions that result in direct harm to the shareholder. This situation is rare, because its difficult for a shareholder to demonstrate that she has suffered a specific harm as a result of actions by the officers or directors.
- Example: ABC corporation denies a shareholder the right to convert her preferred shares into common shares in accordance with her contract rights. The shareholder may personally sue the corporation, officer, or director for the harm she suffers.
What are Shareholder Derivative Suits?
In this type of shareholder litigation, the plaintiffs allege that the corporation itself was harmed by a defendants conduct. Shareholders sue the corporations directors or officers, alleging a breach of fiduciary duties of loyalty or care to the corporation. Any damages to the shareholders are indirect through the overall negative impact on the corporation.
- Example: ABC Corporation CEO makes reckless decisions in several large corporate deals. These decisions have caused a significant decrease in stock price. Shareholders are angry and sue the CEO on behalf of the corporation. If the shareholders win, the corporation will receive a judgment against the CEO. All shareholders benefit equally from the litigation by recovering damages for the corporation.
How do you feel about a shareholders options for protecting and enforcing her rights? Does the ability to bring a direct action or a derivative action adequately protect shareholder rights? Why or why not?
Mike is a director and CEO of Murphy Corp. When Mike decides to retire, he chooses his friend David to replace him as CEO. Mike has such control and power over the board that they hire David and offer him and incredible contract without seeking the expertise of executive compensation consultants. After one year of poor performance, the Board fires David and learns that it will have to pay out the value of his contract. Shareholders are angered by the poor performance and David's payout. What are a shareholders options to protect her rights?
- The shareholder may request that the board of directors elect to sue Mike and/or David for the poor decision-making and performance. If elect not to do so, the shareholders may seek to bring a derivative action. This allows the shareholders to redress harm to the corporation caused by bad management where it is unlikely the management will redress the harm itself. Normally, this requires that the shareholders first petition the board to sue. If they fail to sue, then the shareholders must demonstrate that the board is conflicted or biased. If they can show this, they will be able to file a derivative suit on behalf of the corporation. The purpose of a derivative action is to prove that the misconduct caused the corporation to suffer damages and that there is a wrongful refusal by the corporation or the management to redress the act.
- Corporate Governance Law (Intro)
- What is Business Governance?
- Berle-Means Thesis
- Corporate Governance Rating Definition
- Who are the members of a corporation?
- Corporate Charter
- Shareholder Register
- Common Stock
- Preferred Stock
- Par Value
- Authorized Shares
- Issued Shares of Stock
- Unissued Shares of Stock
- Outstanding Shares
- Institutional Shares
- Dual Class Shares
- What is a closely-held corporation?
- Close Corporation Plan Definition
- What is a Private Company vs a Public Company?
- What is the role and purpose of the corporation?
- What is the Agency theory of corporate governance?
- Shareholder-Centric Perspective
- Shareholder Value
What is the Stakeholder theory of corporate governance?
What is the role & rights of Shareholders in the corporation?
- Shareholder Democracy Definition
- Quorum Definition
- Class Voting Shareholders
- Changing the Voting Rules
- Supermajority (Voting)
- Shareholder Sponsored Proposal
- What are the variations on attributes of Ownership structure?
- Stock Split
- What are the fiduciary duties owed by shareholders?
- When is a shareholder personally liable for corporate obligations?
- Appraisal Rights
- Dissenter's Rights
- Say on Pay Rights
- How can shareholder enforce their rights (direct and derivative actions)?
- What is the process for bringing a Derivative action?
- What are corporate vote Proxies?
- Proxy Statement
- Proxy Fight or Contest Definition & Explanation
- What is Shareholder Activism and the significance of Institutional Investors?
- Activist Investor
- Overview of Board of Directors
- Board Decision Making
- Advisory Board (Observer Directors)
- What is the role of the Board of Directors?
- Board of Trustees
- Board of Governors
- Outside Director
- Outside Director or Non-Executive Director Definition
- Independent Outside Director
- Budget Committee
- Audit Committee
- Compensation Committee
- Nomination Committee (Corporate Board)
- What standards govern the actions of the board of directors?
- Duty of Candor Definition
- Board Evaluation Definition
- What is the Business Judgment Rule?
- What is D&O insurance?
- Codetermination (Foreign)
- What is the role of Managers of the corporation?
- What standards govern manager actions?
- Chief Executive Officer (CEO)
- Chief Financial Officer
- Chief Information Officer (CIO)
- Chief Investment Officer (CIO)
- Chief Legal Officer
- Chief Operating Officer
- Chief Risk Officer
- Chief Security Officer
- Chief Technology Officer (CTO)
- What are the primary state and federal corporate governance laws?
- What is the role of the state in corporate governance?
- What is the role of Securities Laws in corporate governance?
- What is the role of the Foreign Corrupt Practices Act in corporate governance?
- What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
- Sarbanes-Oxley Act (SOX)
- What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
- Corporate Monitors
- What industry organization standards affect corporate governance?
- How do proxy advisory firms affect corporate governance?
- What is the role of ethics in corporate governance?
- What are the major causes of corporate governance issues?
- What are the access to information issues?
- What are decision-making structure issues?
- What are the power struggle or competition issues?
- Holding Company
- What are hostile takeovers and defenses to hostile takeovers?
- Williams Act
- Staggered Board
- Delay-Tactic Defenses?
- Legal Lockup Defenses?
- White Knight and Pac Man Defenses?
- Jonestown Defense
- Lady Macbeth Strategy
- Macaroni Defense
- Yellow Knight
- Back-end Plan Definition
- Backflip Takeover Definition
- Dead Hand Provision Definition
- Kamikaze Defense
- Operating Company Property Company Model
- Scorched Earth Policy Definition
- Revlon Rule
- What are benefit-alignment issues?
- Cadbury Rules Definition