Shareholder derivative suits have become an increasingly important tool for holding corporate executives accountable for their actions. In New Jersey, these suits allow shareholders to sue company officers and directors on behalf of the company itself, alleging that these individuals have violated their fiduciary duties.[1] New Jersey's business corporation law provides the legal basis for shareholder derivative suits in the state.[2] Under this law, shareholders are permitted to bring derivative suits when the corporation's board of directors fails to take action against corporate officers and directors who have breached their fiduciary duties;[3] this can include acts of fraud, self-dealing, or other forms of misconduct.[4]
While derivative suits can be an effective tool for shareholders seeking to hold corporate executives accountable, they can also be a complex and costly undertaking. Initiating a derivative suit requires significant legal expertise and a deep understanding of corporate law.[5] Despite these challenges, derivative suits have become an increasingly popular way for shareholders to seek accountability from corporate executives. This is particularly true in cases of corporate misconduct, where executives have engaged in illegal or unethical behavior that has harmed the company and its shareholders.[6]
One high-profile example of a shareholder derivative suit in New Jersey was the case of Johnson & Johnson.[7] In 2018, shareholders brought a derivative suit against the pharmaceutical company's executives alleging that they had engaged in misconduct related to the company's opioid business.[8] The suit alleged that the executives had failed to disclose the risks associated with these drugs, resulting in significant harm to patients and reputational damage to the company.[9] The Johnson & Johnson case highlights the potential benefits of shareholder derivative suits. By holding executives accountable for their actions, these suits can help to prevent future misconduct and promote greater transparency and accountability in the corporate world.[10] They also provide a mechanism for shareholders to seek damages on behalf of the company and recover lost funds.[11]
In recent years, New Jersey courts have been more skeptical of shareholder derivative suits, and have become more likely to dismiss them if they are deemed frivolous or without merit.[12] This has led some to argue that the legal system needs to be reformed to better protect shareholders and promote greater corporate accountability. One proposal for reform is to increase the burden of proof required for derivative suits. This could involve requiring shareholders to provide more evidence of misconduct before a suit can be brought or increasing the legal standard for establishing a breach of fiduciary duty.[13] Another proposal is to increase the transparency of corporate governance and management practices.
It is important to be wary of your options as a shareholder in a New Jersey corporation if there is wrongdoing amongst the entity. For more information on the topics covered here today, or for services related to your specific situation, contact our knowledgeable corporate governance attorneys at (212) 404-8644 or email info@kilegal.com to get the help you need.
This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.
KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.[1] https://www.njcourts.gov/attorneys/rules-of-court/derivative-action-shareholders
[2] Id.
[3] Id.
[4] https://olenderfeldman.com/new-law-limits-viability-of-shareholder-derivative-suits-in-new-jersey/
[5] Id.
[6] Id.
[7] https://www.nj.com/business/2010/12/njs_johnson_johnson_facing_sha.html
[8] Id.
[9] https://casetext.com/case/in-re-johnson-johnson-derivative-litig
[10] Id.
[11] Id.
[12] https://casetext.com/case/in-re-pse-g-shareholder-lit
[13] Id.
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This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.
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KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.