Shareholder Derivative Suit

If a shareholder of a corporation observes that a third party has caused harm to the corporation and if the corporation will not act to address that harm, then a shareholder may have some rights to act on behalf of the corporation. The vehicle to achieve this result is known as a shareholder derivative suit. Often the third party is an insider of a corporation, such as an officer or a director and that may be a reason why the corporation chooses not to act.

An aggrieved shareholder must normally give notice to the Board of Directors of the damage which has been caused or is being caused and demand that the corporation take action. The demand rule is a central concept in the shareholder derivative process because officers and directors are considered to be “best positioned” to determine whether pursuing a case is in the best interest of the corporation. Certainly deference should be given to their judgment on the matter. Nonetheless, if a proper demand is made, an individual shareholder may file a lawsuit derivatively on behalf of the corporation seeking to enforce a corporate right.

Importantly, Pennsylvania rules require that a derivative complaint must set forth the efforts made to secure enforcement by the corporation or the reason why such efforts were not made.

— Bill Brennan

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