What Shareholders Need to Know About Derivative Lawsuits

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What Shareholders Need to Know About Derivative Lawsuits

There are times when improper conduct by a company’s officers or directors places the value of a company at risk. Under these circumstances, shareholders can assert their ownership rights by seeking relief through a derivative lawsuit. Some common examples of derivative claims are breach of fiduciary duty or fraud by corporate officers or directors, breach of statutory duties by an officer, and other causes of action that allege the violation of rights that caused injury to the company itself.

Derivative claims are brought by one shareholder on behalf of all shareholders in a corporation or LLC. Unlike in a direct claim, the claimed harms are not unique to a single member or shareholder; rather, the misconduct harms the company itself and, therefore, the harm to each of the company’s members or shareholders is derivative of the company-wide harm.

Arizona law regarding derivative claims is governed by statute with respect to both corporations and LLCs. Regardless of the business entity, the procedures for filing a derivative claim are similar:

  • Only someone who is a shareholder at the time of the incident has the authority to bring a derivative claim.
  • The shareholder must meet the “continuous owner requirement” by owning stock at the time of the improper conduct as well as throughout the resolution of the lawsuit.
  • The claim must be brought reasonably and fairly on behalf of all shareholders or members of the business entity.
  • Prior to filing suit, the shareholders must inform company management in writing about the problem and request that suitable action be taken to correct the wrongdoings.
  • A suit cannot be filed for 90 days after the demand letter is received unless shareholder demands have already been rejected, the statute of limitations would expire during the 90-day waiting period, or irreparable harm would come to the company during the waiting period.
  • All shareholders must be informed in writing about the derivative lawsuit to provide them an opportunity to join.

Arizona law also provides opportunities to terminate a derivative claim if certain conditions apply:

  • If the company resolves the issues raised in the derivative claim, thus eliminating the basis for that claim.
  • If the company asks the court to appoint an independent panel to determine if the lawsuit is in the best interests of the company and the panel concludes that the derivative proceeding is not in the best interest of the company.

At Williams Mestaz, L.L.P., we focus our efforts on representing your business interests throughout the duration of your case. When you need help that only an experienced business litigation attorney can offer you, contact Williams Mestaz, L.L.P., at (602) 256-9400.

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