Derivative Action, Fiduciary Duty to Shareholders, and Rights

Helping Shareholders Demand Corporate Accountability

When an individual purchases stock in a publicly traded corporation, they become an owner of the company. While the board of directors and executive officers run the daily operations of the company, they serve at the pleasure of the stockholders.

Robbins LLP is committed to the principle that the officers and directors of publicly traded corporations should be held accountable to the true owners of the enterprise – the stockholders. When poor decisions, disregard for corporate policies, and blatant misconduct by officers and directors cause the value of a company’s stock to decline, shareholders can seek justice.

Through legal action asserting shareholders’ rights, a single shareholder can act on the company’s behalf to remedy the harm caused to stockholders, strengthen and protect the company from future wrongdoing, and improve shareholder confidence in the company’s leadership.

Through this type of legal action, investors can hold wrongdoers accountable. A successful lawsuit can restore wholeness to a company, while also improving its governance practices, and preventing repeat offenses.

What is Shareholder Derivative Action?

A shareholder derivative action is a lawsuit brought by a stockholder or group of stockholders to challenge the breaches of fiduciary duty to shareholders by officers and directors of the corporation. Through this type of legal action, a single investor can act on the company’s behalf to remedy the harm caused to stockholders, strengthen and protect the company from future wrongdoing, and improve shareholder confidence in the company’s leadership. A successful shareholder derivative action can restore wholeness to a company by recovering its lost assets, improving its governance practices, preventing repeat offenses, and holding the fiduciaries personally liable for their malfeasance.

What are Fiduciary Duties?

The sheer trust factor a shareholder must place in corporate fiduciaries renders it imperative that they have some assurance that corporate fiduciaries will hold themselves to the highest ethical and moral standards while acting on behalf of the corporation. This responsibility encompasses the “fiduciary duties” that, if not complied with, can open the door to a shareholder derivative action.

The Legal Information Institute at Cornell Law School points centrally to these duties:

Duty of care (assurance that a financial decision proceeds only after a reasonably diligent assessment of all key information)
Duty of loyalty (conflict-avoidance; a director/officer’s actions must be made with utmost regard for shareholders’ well-being and not based upon personal entitlements or profit)
Duty of good faith measured by adherence to legal requirements
Duty of disclosure (shareholders must be kept duly informed of facts/data relevant to a director’s decision)
Duty of confidentiality (no corporate information divulged for personal benefit)

When these duties are not properly satisfied, there tends to be a breakdown in the relationship between shareholders and management.

Breaches of Fiduciary Duties Impede Corporate Governance Policies

A breach of these fiduciary duties undermines the delicate balance of the relationship between the company’s board and its shareholders and can signal an alarm identifying other issues confronting the board, such as poor corporate governance policies.

Instances of failed corporate governance can both undermine shareholders’ key prerogatives and materially harm the entity centrally relying upon them to stay viable and profitable.

Poor corporate governance results from multiple and diverse factors, including these lapses:

Diminished board/executive recognition of shareholders’ primacy
Lack of transparency or the disclosure of specifically misleading statements, both to equity funders and to the general public
Inadequate security (e.g., ranging from authentication safeguards to protection of trade secrets and proprietary data)
Break in the corporate chain of accountability (for example, cover-up behaviors regarding finances and accounting that are purposefully hidden to escape the due scrutiny of shareholders)
Festering of conflicts of interest to the benefit of officers and directors
Allowing the company to engage in illegal conduct
Awarding executives excessive compensation

When fiduciaries do not properly govern, it not only harms shareholders financially, but it also harms the company’s integrity and reliability in the eyes of the shareholders and general public. If investors become weary of the organization’s management, it can lead to difficulty in raising capital. Additionally, a company with a reputation for lack of adherence to implementing corporate governance policies can draw increased attention from governmental agencies looking to verify the company is complying with the law.

How Can Shareholders Address Breaches of Fiduciary Duties?

Lapses in corporate governance can signal to shareholders the need to engage in dialogue with corporate fiduciaries. Impacted shareholders are empowered to take meaningful action against board members and company officers whose breaches of fiduciary duty and other unlawful actions have harmed the company and its shareholders.

Litigation Demand: One of the duties of a company’s directors is to pursue litigation against those who have harmed the company. If the directors fail to take action against the wrongdoers, a shareholder can do so. In some cases, this will take the form of a formal written demand on the company’s board to act in a manner expected by the stockholders. The board will evaluate the wrongdoing alleged, by either creating an independent committee or seeking outside counsel for guidance. If the committee supports the action, it will sue the directors engaging in wrongful conduct. However, if the committee recommends not pursuing the suit, the stockholder can choose whether to initiate formal litigation against the board. The shareholder can also seek books and records to evaluate whether the committee acted in good faith in evaluating the claim.

Inspection Demand: Prior to filing a lawsuit, stockholders can seek books and records to evaluate the board’s actions in the face of the alleged wrongdoing. Oftentimes, documents discovered during this discovery phase will reveal the true extent of the wrongdoing and the board’s knowledge of the same, clearing the way for a strongly supported case against the wrongdoers.

Shareholder Derivative Litigation: When the wrongdoing is blatant and the evidence clear, stockholders can bring formal legal action against the board, company executives, and others who engaged in the wrongdoing. A shareholder will pursue a shareholder derivative action against the corporate fiduciaries for the benefit of a corporation. Rather than receiving direct damages from this type of case, shareholders help to bring justice to the wrongdoers who harmed the company.

Remedies obtainable through shareholder derivative actions include:

Reforms to corporate governance
Prevention of future similar fiduciary misconduct
Financial compensation to the company
Removal of officers and directors who injured a corporation through their misconduct
Correction of wrongfully obtained gains

Corporate Merger and Acquisition Class Action: When corporate fiduciaries fail to look out for the best interests of company stockholders when engaging in proposed acquisitions or mergers, leveraged buyouts, and transitions to private ownership, shareholders can take action. Such transactions may be unfair in substance or procedure. The transaction might be wrought with conflicts of interests for the personal benefit of insiders looking to gain positions at the new company or significant buyout packages. In these instances, shareholders can being a class action lawsuit to hold the board and executives accountable for their actions. A successful class action lawsuit verifies whether a proposed transaction is, in fact, in the best interests of shareholders and can correct unfair aspects of the transaction.

Remedies obtainable through corporate merger and acquisition class actions include:

Safeguard shareholders’ rights to receive full and fair disclosure of material information before they vote to approve or reject a proposal
Remove obstacles to a fair sales process
Increase the value of the deal

Robbins LLP Supports Shareholders and Provides Results that Matter

Our services on behalf of shareholders have a proven track record of protecting and enhancing shareholder rights and value, holding directors and officers accountable for corporate misconduct, and improving corporate governance at companies across the country. Our firm’s experienced attorneys include former federal prosecutors, defense counsel from top corporate law firms, in-house counsel from leading financial institutions, and career shareholder rights litigators. Our attorneys have litigated in almost every state in the country and are not intimidated by power financial players or an uphill battle. We have:

Secured several of the largest monetary recoveries in the history of shareholder derivative litigation, including $70 million on behalf of Cardinal Health, Inc., $60 million on behalf of Community Health Systems, Inc., and $40 million on behalf of Sears Holdings Corporation
Obtained $500 million in additional consideration to Unocal’s stockholders as part of an increased bid of $17.4 billion by Chevron Corp.; obtained a $19.5 million settlement fund to increase the price per share for Saba Software, Inc. stockholders damaged by an allegedly flawed sales process; and secured a $16 million settlement fund for PETCO Animal Supplies, Inc. stockholders through a class action relating to the insiders and directors’ attempt to sell the company at an unfairly low price to its own affiliates in a going-private transaction
Helped Fortune 1000 companies pursue litigation against those insiders who harmed them and fixed corporate governance structures to prevent future wrongdoing
Saved companies from bankruptcy and preserved the equity interests of shareholders
Helped hundreds of shareholders hold the officers and directors of the companies they have invested in accountable for their misconduct

Have Your Investments Been Harmed Due to a Breach of Fiduciary Duty?

Robbins LLP assists individual and institutional shareholders who demand corporate accountability, integrity, and honesty from their corporate executives by taking aggressive legal action against company insiders, such as the executive officers and board members, who harmed the corporation through their wrongdoing. The proven and aggressive shareholder rights legal team of Robbins LLP can seek remedies for breaches of fiduciary duties and the implementation of corporate governance reforms to ensure proper and profitable conduct by the directors and officers.

Robbins LLP offers no cost representation. We work on a contingency fee basis, meaning we advance all attorneys’ fees and expenses incurred by the litigation. If we are successful in obtaining a monetary recovery or substantial non-monetary benefit for the corporation or the shareholders we represent, we will seek to have the court approve our fee request, which will be paid by the corporate defendants and/or their insurance carriers. Robbins LLP never seeks reimbursement for attorneys’ fee or costs directly from our stockholder clients.

Shareholder Rights & Fiduciary Duties