What is a derivative lawsuit and what are some unique considerations?
San Francisco business litigation attorney, Bahram Seyedin-Noor, talks about derivative lawsuits.
Phone: (415) 868-5602
A derivative lawsuit is one that a shareholder brings not on their own behalf but on behalf of the corporation. And typically, you see these lawsuits in securities disputes where a shareholder comes forward and has claims against current directors or former directors or officers of the company. And the shareholder is bringing those claims on behalf the corporation that’s sort of the definition of what a derivative lawsuit is.
Derivative lawsuits are unique and there are at least three things that you should think about and be aware of if you’re either defending or suing derivatively. And the first of those is standing. Does the shareholder who’s bringing the lawsuit actually having standing to pursue the claims? There are lots of specific procedural requirements that go to the issue of standing including whether the shareholder has demonstrated that the lawsuit should be permitted to be brought derivatively rather than giving the board of directors the right to control the litigation.
The other issue is specific defenses. There are defenses that one often sees in these kind s of derivative lawsuits. Often the certificate of incorporation of the company has specific what we call exculpatory provisions that protect those directors or officers that are being sued. And the law of the jurisdiction as well as the language of the certificate are key to exploring what those defenses are. There are also all kinds of other defenses that we don’t have time to go into.
But the last part is settlement, most of these cases settle. And the specific mechanics of settling a derivative lawsuit are different in federal versus state court. In federal court, you have federal rule of civil procedure 23.1, which has specific requirements that have to be satisfied before the judge can even approve a settlement in a derivative lawsuit. In the process of trying to settle a derivative lawsuit because the law firm that’s defending the individuals or the company has maybe different duties to each of them there are very specific ethical guidelines that have to be followed when you’re dealing with the settlement of a derivative lawsuit. So it’s a complex variety of a securities lawsuit and it’s the sort of area where you want to make sure your lawyer has done it many times before.