Shareholder Derivative Suit in Delaware

Delaware is widely considered to be the corporate capital of the United States. It is home to over a million corporations, including over 60% of Fortune 500 companies.[1] This is largely due to Delaware's business-friendly legal system, which includes a well-developed body of corporate law that provides corporations with flexibility and predictability in their operations.[2]

One key aspect of Delaware's corporate law is the availability of shareholder derivative lawsuits. A derivative action is a lawsuit brought by a stockholder, on behalf of the corporation, to enforce a claim belonging to the corporation.[3] Generally, injuries to the corporation which hurt the value of the corporation’s stock or assets give rise to claims belonging to the corporation. These lawsuits allow shareholders to sue on behalf of the corporation when the corporation's management or board of directors have failed to act in the best interests of the company.[4] Shareholder derivative lawsuits have become an important tool for corporate governance, providing a mechanism for shareholders to hold corporate management accountable.[5]

A derivative action typically involves claims against a director or officer of the corporation for mismanagement or breach of fiduciary duty but can also include claims against others such as outside accountants or advisors.[6] Directors (or other fiduciaries) of corporations or associations have duties to the investors and the corporation to act in good faith and with loyalty, due care, and complete candor. A unit holder or limited partner in a limited partnership may also bring a derivative action on the partnership’s behalf.[7]

Delaware's corporate law provides a well-developed body of law for shareholder derivative lawsuits, with clear standards for bringing such lawsuits and for the duties of directors and officers. [8] Furthermore, Delaware law requires that a shareholder bringing a derivative lawsuit must have standing to do so.[9] To have standing, the shareholder must have owned stock in the corporation at the time of the alleged wrongdoing and must continue to hold the stock throughout the litigation.[10] The shareholder must also show that they have made a demand on the board of directors to take action and that the board has refused to act, or that making a demand would be futile. Delaware law also requires that the shareholder must allege with particularity the actions of the directors or officers that constitute a breach of their fiduciary duty.[11] This means that the shareholder must provide specific facts that support their claim, rather than making vague allegations.[12]

In Delaware, shareholder derivative lawsuits serve as an important check on corporate management and board of directors.[13] They provide a mechanism for shareholders to hold these parties accountable when they have breached their fiduciary duty to the corporation. By doing so, shareholder derivative lawsuits help to promote good corporate governance.[14] When corporate management or board of directors act in their own interests, rather than in the best interests of the corporation, they can cause harm to the corporation and its shareholders. Shareholder derivative lawsuits provide a way for shareholders to address this harm, and to seek a remedy that benefits the corporation as a whole.[15]

In conclusion, Delaware's well-developed body of corporate law provides clear standards for bringing shareholder derivative lawsuits, ensuring that they are brought in a fair and consistent manner. As the corporate capital of the United States, Delaware plays a crucial role in promoting good corporate governance through its support of shareholder derivative lawsuits. It is important to be wary of all the benefits and risks if bringing a shareholder derivative suit in Delaware. 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.