When an investor buys the stock of a corporation, he or she becomes an owner of the company. Although the board of directors and appointed executive officers run the day-to-day operations of the company, they ultimately serve at the pleasure of the shareholders. Although management is the job of the directors, shareholders are permitted under certain circumstances to file a lawsuit on behalf of the corporation. These are called shareholder derivative suits or shareholder derivative actions.
Many derivative suits are brought against a particular officer person at the company for breach of contract or breach of fiduciary duty. Other derivative actions are filed against accountants and other advisers who have somehow harmed the corporation.
Only shareholders of a corporation can bring a derivative suit and State laws and federal procedures almost universally require that the shareholder show that he or she attempted to bring the problem to the attention of company’s directors, but they chose not to pursue the action.
If you are a shareholder of a company that’s being mismanaged, exercise your rights and talk to a lawyer about bringing a shareholder derivative suit.
Know that in nearly all jurisdictions, any damages or other proceeds collected as a result of a successful shareholder derivative lawsuit are retained by the corporation, rather than the shareholder who initiated the suit.