In recent years, shareholder derivative suits have become an increasingly common way for investors to hold corporate executives accountable for misconduct. In New York, these suits are a legal tool that allows shareholders to sue company officers and directors on behalf of the company itself, alleging that these individuals have violated their fiduciary duties.[1] The legal basis for shareholder derivative suits in New York is established by the state’s Business Corporation Law.[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, including acts of fraud, self-dealing, or other forms of misconduct.[3]
In many cases, shareholder derivative suits in New York are brought against large corporations and their executives for alleged wrongdoing. Such suits can be initiated by a single shareholder or a group of shareholders, who then file a complaint in court.[4] The complaint will outline the alleged misconduct by the officers and directors and ask the court to intervene and take action against them. The goal of a shareholder derivative suit is to force corporate executives to be held accountable for their actions and to seek damages on behalf of the company. These damages can include the recovery of money lost by the corporation as a result of the misconduct, as well as any other losses incurred by the company.[5]
Despite their potential benefits, shareholder derivative suits can be complex and costly, both in terms of time and money. They require significant legal expertise, as well as a deep understanding of the intricacies of corporate law. Shareholders who initiate derivative suits also face the risk of countersuits by the corporation or its executives, which can further complicate the legal process.[6] In recent years, New York 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.[7] However, when brought in good faith and with strong evidence of misconduct, these suits can be an effective tool for shareholders seeking to hold corporate executives accountable for their actions.
In conclusion, shareholder derivative suits in New York are an important legal tool that enables shareholders to hold corporate executives accountable for misconduct. While they can be complex and costly, they are an effective way to seek damages on behalf of the corporation and to promote greater accountability and transparency in the corporate world. As such, they remain a critical component of the legal system, serving as a check on the power of corporate executives and promoting greater corporate responsibility.
It is important to be wary of your options as a shareholder in a New York 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 (646) 766-8308 or email info@kilegal.com to get the help you need.
[1] https://www.pbwt.com/ny-commercial-division-blog/category/shareholder-derivative-litigation/
[2]https://codes.findlaw.com/ny/business-corporation-law/bsc-sect-626/
[3] Id.
[4] Id.
[5] https://www.laborlawfirm.org/shareholder-disputes.html
[6] https://clsbluesky.law.columbia.edu/2019/02/28/shareholder-litigation-risk-and-corporate-cash-policy/
[7] Id.
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