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What does it mean that a shareholder filed a derivative suit?

Running a business involves making complex and perhaps even risky decisions in order to make it profitable and to find its place in the open market. As an officer or director of the business, you may be directly involved in many of those decisions. For better or worse, you do what you can to make the company a success and to make the shareholders happy.

The latter may not always be easy. You may make a decision that results in a significant loss, or miss an opportunity that may have provided significant success to the business. This is the nature of the business, but sometimes, shareholders believe that you mismanaged the company through your action or inaction.

The shareholder derivative suit

Put simply, the shareholder doesn't think the officers and directors of the company (including you) manage the business appropriately, and he or she suffered some harm because of it. In some cases, a shareholder may accuse you of wrongdoing. The shareholder attempts to step in to protect his or her interest, yes, but also to technically protect the company by filing a shareholder derivative suit.

More specifically, as either an officer or director, the shareholder accuses you of failing to take some action that would have benefited the company and its shareholders. In the alternative, you could find yourself accused of taking some action that harmed the company.

The complaints don't go directly to court

Before the shareholder can file the action in a Texas court, he or she must inform the board of the complaint or complaints. This serves as a type of "demand letter," demanding them to take some action or not to take some action on behalf of the company.

The board will have a certain amount of time to address the shareholder's concerns. The board may bring in disinterested directors to form a committee who were not involved in the original complaint to review the situation and determine whether the board should support the shareholder or not. This time of review could provide you and the other officers and directors the opportunity to rectify the situation without the need for protracted litigation.

If the committee does not agree with the shareholder, then the board will not take any further action regarding the derivative action against you. However, the shareholder may continue with or without the board's support. There could be more than just a monetary judgment and non-monetary orders by the court at stake if the shareholder prevails. If the action is deemed serious enough, you could face personal liability for it through the courts.

It would be a good idea to involve a legal advocate in the process as quickly as possible in order to provide the advice and assistance you need to appropriately defend your actions.

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Plunk Smith, PLLC
1701 Legacy Drive, Suite 2000
Frisco, TX 75034

Phone: 972-370-3333
Fax: 972-294-5274
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Plunk Smith, PLLC
Plunk Smith, PLLC