Castigating a Corporate Misconduct through Derivative Suits

In any company operational procedure, cases of professional negligence, fraud, misconduct and/or deceitful practices may happen. Various scenarios also happen wherein a company’s top executives are ignoring these unlawful dealings for some reasons: either they are the ones responsible of such misbehaviors or they are unaware of such illicit practices because no one dares to divulge the issue. Consequently, the company’s growth and effectiveness are being put in jeopardy.

The common question then, would be, who may file charges against the unruly parties for the sake of the company’s well-being?

Obviously, businesses would not want to be charged in courts. These legal actions would certainly destroy the image of the whole company and even instigate bad relations among the shareholders. Still, most of the times, it is better to stop a person’s misdemeanor than to continuously affect the company’s operations.

Majority of the state legislations in the U.S. consists of provisions that allow a shareholder to pursue legal actions against company officers who has been abusive of their powers. This is because being a shareholder entitles a person to represent the whole company if such illegal acts endanger the business. Yet, certain provisions stated under the law bind this privilege.

As these legal actions are called, shareholder derivative lawsuits are based on the doctrine that the law as an entity having its own rights, privileges and responsibilities considers a business. It might as well sue and be sued just like any other person. Nevertheless, since a company cannot act on its own, a shareholder, as a part owner of the company, may pursue a case against the wrongdoers.

If a shareholder decides to file a derivative action, he will go through the following stages:

• He must first inform the company’s board of directors of his plan of making legal actions by filing a demand letter.

• He must wait for at least a period of 90 days upon the board’s receipt of the demand to give them ample time to perform their actions.

• If the time limit has elapsed and the company’s officials have rejected or did not do anything in response to his demand, the board may be obliged to form a "special litigation committee" if the shareholder still wants to pursue his case. However, he must first fulfill the requirements set under the Model Business Corporation Act §7.44(d).

• If the "special litigation committee" decided to dismiss the case, it is now the choice whether to file a derivative suit or not.

The procedures in filing a shareholder derivative suit definitely entail several intricate provisions. A plaintiff usually necessitates a credible and highly skilled business lawyer to assist him in pursuing his case. This is to make sure that all the law provisions are properly adhered to and all the plaintiff's rights are protected.

For more information about corporate misconduct and Shareholder Lawsuits retain the assistance of a Los Angeles Lawyer