The role of a shareholder, no matter how many or few shares they hold, plays critical importance in upholding the balance in the administration and compliance of a corporation. Since shareholders own a share of the corporation, they are part of the collective body that influences the corporation’s operation by electing officers, and even filing actions, even if they are only part of the minority shareholder. Direct claims and derivative lawsuits are two main types of lawsuits that a shareholder or minority shareholder can bring against a corporation or its majority shareholders.
What Are The Critical Differences Between Direct Claims and Derivative Lawsuits?
Understanding the critical differences between a direct suit and a derivative lawsuit help explains how shareholders, even minority shareholders, can directly impact a corporation’s bureaucracy.
Distinct differences between direct claim and derivative lawsuits are who can be the claimant in the suit.
For direct claims, a shareholder or a minority shareholder initiates the complaint by seeking action for the harm they had suffered due to the majority shareholder or the corporation’s actions, or even its failure to act.
For derivative lawsuits, a shareholder or the minority shareholder files the suit on behalf of the corporation. Instead of claiming that they have suffered, the shareholder is bringing the case, claiming that the corporation has a reasonable cause of action against the officers and directors of the corporation.
Cause of Action
For direct claims, a shareholder or minority shareholders must allege that their suffering was based on at least one of the following causes of action committed by the corporation or the majority shareholder:
Fraud & Conspiracy
This claim refers to a covert scheme to accomplish an end that would be disparately beneficial to the corporation or majority shareholders but would harm the minority shareholders.
Breach of Statutory Duties
This refers to the violation of duties by the corporation or the majority shareholders as stated by the law.
Breach of Confidential Relationship
This refers to the violation of the corporation’s expectation or the majority shareholder to not disclose to a third-party person of non-public and material information.
For derivative lawsuits, the shareholder bringing the suit on behalf of the corporation can use one of the causes of actions listed above. However, it is essential to note that claiming that the corporation’s majority shareholder or officers or directors have breached their fiduciary duty to the corporation can only be claimed in a derivative lawsuit.
The fiduciary duties owed to the corporation under a derivative lawsuit are as follows:
Duty of Care
The expectation is that the officers and directors use appropriate care and diligence when acting in their capacity on behalf of the corporation.
Duty of Loyalty
This refers to the obligation of the officers and directors to always put the corporation’s best interest before their own personal and business interests.
Duty of Obedience
This refers to the expected commitment from the officers and directors to fulfill their duties within the capacity of their delegated authority under governing corporate documents and corporate law.
Duty of Good Faith and Fair Dealing
This refers to the responsibility of the officers and directors to act on behalf of the corporation in good faith.
Duty of Disclosure
This refers to the duty of the officers and directors to disclose any material facts to the shareholders or any potential conflict of interest between their personal or business interests that could compromise their official capacity on behalf of the corporation.
The Beneficiary Of The Lawsuit
In direct claims, shareholder files the lawsuit based on their damages, and thus, the shareholder that files the case will generally recover the damages.
In derivative lawsuits, the corporation is technically the beneficiary of the damages from the case since the claim is filed on their behalf. However, if a minority shareholder filed the derivative suit, the proceeds recovered in the claim will only be dispersed to the minority shareholders who suffered damages due to the majority shareholders’ actions or non-action. This means that the majority shareholder will not receive a portion of the damages, even if they are part of the corporation and the lawsuit was filed on behalf of the suit.