Meaning
A legal action brought by a shareholder on behalf of a corporation to remedy a wrong done to the company by its directors or officers. This legal right is exercised when the board of directors refuses to sue the wrongdoers because the directors themselves are implicated in the misconduct. It exists to protect the assets of the company from internal mismanagement.
Shareholder Action
Individual investors do not sue in a personal capacity or for personal damages. This claim is brought to recover losses for the corporation itself, which receives any awarded damages. It allows minority investors to challenge decisions made by the controlling majority or the board.
Procedural Prerequisite
The plaintiff must first demand that the board of directors take action unless such a demand would be futile. This requirement prevents frivolous lawsuits and protects the board’s authority to manage the affairs of the corporation. If the board rejects the demand or is disabled by conflict, the court must grant permission for the suit to proceed.
This permission is only given if the shareholder demonstrates a prima facie case that is in the best interests of the company to pursue.
Litigation Outcome
Success in the lawsuit results in the recovery of assets or financial compensation for the corporation. This outcome improves the overall value of the company and protects the investments of all shareholders. It remains a common instrument of corporate governance.
