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Following our commitment to keep introducing new series and topics, this blog introduces you to our video titled “Derivative Claims Made Easy!” Providing you with a dissection of the basics of derivative claims, we hope to not only keep you in the know but also provide you with tips on how to stay ahead of the game in this area of e-general business and corporate law. As usual, you can access the video through the link provided at the end of the blog.
What does it mean by “Derivative?”
For starters, derivative claims derive from a creationist statute. So, what does the term “derivative” mean? In layman’s language, the term derivative means that something (such as an action or claim) derives from something else. This is why they are also called “derivative actions.”
What does it mean by a Derivative Claim?
Accordingly, a derivative claim (or derivative action) refers to a lawsuit brought by a shareholder or managing member (who may have equitable or shareholder rights) of some entity (LLC (limited liability company) or financial corporation) and on behalf of that entity following the breach of duty by a director.
A Typical Scenario will do the Trick!
You are a shareholder of Company C, but a director, or even the entire board of directors, has been engaging in some sort of malpractices or mismanagement in running the company. Unfortunately, you are a minority shareholder and, thus, do not have the ability to sue as per the terms and conditions of being a shareholder with this company. Luckily, a creationist statute allows you to bring derivative actions against the director or the board.
What are the Benefits of a Derivative Claim?
Such a derivative action brings forth many benefits. First things first, it acts as a bridge through which you can have a cause of action but which you could not have had otherwise. Additionally, it provides the shareholder with the opportunity to have a second bite of the apple. Assuming that the shareholder might be able to sue the board for something, a derivative action permits this individual to make a claim from a different angle or for a second time. Another benefit is that it is a way to sue for damages, which one incurred as an individual and those that the company incurred due to the malpractices. Further, it is another way of getting attorney’s fees. Generally speaking, many state statutes permit the recovery of attorney’s fees in derivative claim lawsuits. A good example is the Delaware Business & Corporate Law (Del BCL), which permits attorney fees to be recoverable in derivative actions.
Who Can Bring a Derivative Action?
Generally, derivative claims or derivative actions are brought by the shareholder(s) of a company, irrespective of whether one is the minority or majority shareholder. Thus, the members of an LLC or partners within any business or financial partnership comprise shareholders who qualify to bring a derivative action in court.
So, When Does it make the Most Sense?
Usually, a derivative claim makes sense in two instances. The first instance regards a situation where a director or the board of directors engages in lots of corporate malpractices such as fraud and the mismanagement of funds or resources to the point that the company is falling apart and its moral stand being egregiously eroded. The second instance concerns when the entity is a non-publicly traded company. When a company is publicly traded, all its paperwork is basically left out since all information is publicly filed. However, if it is a non-publicly traded company, you do not have that ability. Therefore, a derivative action helps suing such a non-publicly treated company by subpoenaing people for interrogations and review of documents, which would be impossible otherwise.
So, How Does it Work?
The whole process starts with a shareholder bringing a derivative action, after which this individual may be asked for a bond in some instances. Next, the shareholder would have to submit a demand but specify what kind of demand it is. For instance, a shareholder may make the case that the demand is futile. However, the individual would be required to submit some sort of demand, such as the need to seek damages for whatever they may be looking for.
With you now are the basics of a derivative claim or action. Through the questions and answers provided in this blog, we hope that we have provided you with essential information that made you more informed and enlightened and, eventually, armed you with tips on how to stay ahead of the game in this area of law.
Please, feel welcome to view our video at https://www.youtube.com/watch?v=MmUaUg-Osuc.
In the meantime, stay tuned for the next instalment and always strive to be #UnusuallyMotivated. In the interim, reach out to us with questions and/or comments on our website at the Contact Us page!
Always rising above the bar,
Legal Writer & Author.