Thursday, December 18, 2014

Shareholder Derivative Suits

With Civil Procedure now tested on the MBE, shareholder derivative suits may pop up in the questions. Under the Federal Rules of Civil Procedure a shareholder can sue to enforce a right of the corporation that those in control of the corporation refuse to assert. The derivative action may not be maintained if it appears that the plaintiff (the shareholder) does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. For a derivative suit apply the shareholder must allege and prove the following:

(1): The shareholder was a shareholder at the time of the transaction that is the subject of the complaint (or received shares thereafter by operation of law).

(2): The action is not a collusive effort to confer jurisdiction on the court that it would otherwise lack.

(3): The shareholder either made a demand on the directors of the corporation to resolve the complaint, or the shareholder has provided reasons why no demand was made. Facts here must be pleaded with particularity.

It's also important to note on this issue that a judgement in a shareholder derivative suit runs directly to the corporation rather than to an individual shareholder, so that when determining whether jurisdiction is proper, the jurisdictional amount will be determined by the damages allegedly suffered by the corporation. When determining venue, focus on where the corporation could have sued the defendant, as that will be the proper venue in which the shareholder bringing the suit may sue.

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