How Is A Derivative Lawsuit Different From A Direct Lawsuit?

Shareholders have the ability to file lawsuits against corporations and directors. This can either be a derivative or a direct lawsuit. The most common example of a derivative action is when a shareholder decides that the company is being mismanaged. Oftentimes, the shareholder accuses the corporation of engaging in fraud.

Direct Lawsuits

A direct lawsuit is when a shareholder, acting on behalf of the other shareholders, decides to sue another party associated with the corporation. The lawsuit's goal is to prove some level of harm that the corporation carried out. The defendant in this type of lawsuit will be the board of directors in most cases. 

Derivative Lawsuits

With a derivative lawsuit, legal action is taken against an insider of the corporation with the understanding that the insider did something detrimental to the company. When taking this legal action, you will need to show that you first attempted to bring attention to the appropriate authorities before you took legal action.

Legal Representation

Filing a derivative lawsuit can be very difficult and is something that you will usually only want to do when you are working with a corporate litigation attorney. Each state has its own requirements, and you will need advice from a lawyer who is licensed to practice in the state in which the corporation is located.

How to Get Started

The shareholder will typically ask to look at the records of the company so that they will be able to determine the values of certain shares. The shareholder might also want to obtain a list of other shareholders so they can get in contact with them so that they can begin the process of filing a lawsuit.

Oftentimes, when you are filing a lawsuit, all you know is that you are being cheated and you want something to be done about it. However, whether you should file a derivative lawsuit can be difficult even for a lawyer to determine. You may want to inform the board of directors that you intend to secure legal counsel, and they might begin taking your concerns seriously after you have made the decision to lawyer up. 

The Resolution of the Case

Once you have filed a derivative action, your case will proceed until it has been dismissed by the court or you have reached a settlement that is approved by the court. In some cases, corporate litigation is the only option and must be done for the best interest of the company.

Contact a corporate litigation attorney for more information.