Should You File a Derivative or Direct Shareholder Lawsuit?

As a shareholder in a company, you can file a derivative or direct lawsuit on behalf of or against the company. Many shareholders do not understand the difference between these two types of lawsuits. However, it is imperative that you know what a derivative and direct shareholder lawsuit entails to ensure that you take appropriate legal action in your particular case. 

The decision about which type of lawsuit to file depends on the specific circumstances of your case, which is why you need to consult with an experienced attorney. The commercial litigation attorney at The Parzivand Law Firm, PLLC, helps shareholders pursue both derivative and direct lawsuits. Also, he can walk you through each process while keeping your best interests in mind. From his office in Stafford, Texas, Hessam also serves Sugar Land and other parts of Fort Bend County.

Derivative Lawsuit: What Is It?

A derivative lawsuit is a type of legal action filed by a shareholder on behalf of the company against its directors or officers. These lawsuits are brought when those in charge of the company have committed a wrongdoing or breached their fiduciary duties to the shareholders. Shareholders may file a derivative lawsuit if the company has suffered damages that can be attributed to the actions of the directors or officers.  

In order to file a derivative lawsuit, a shareholder can require to make a demand on the company’s board of directors to take legal action against those responsible. If the board does not act, the shareholder may then bring a lawsuit in the name of the company. The shareholder does not stand to receive any monetary damages from a derivative lawsuit, but any damages awarded in the case will go to the company, which can benefit the shareholders in the form of higher stock prices or dividends. 

Direct Lawsuit: What Is It?

A direct lawsuit is a legal action filed by a shareholder against the company itself (not the directors or officers). These lawsuits come forth when the shareholder directly suffers damages at the hands of the company, such as a loss in stock value or missed dividends.   

In a direct lawsuit, the shareholder directly benefits from any damages awarded. However, the burden of proof is higher than in a derivative lawsuit because the shareholder must prove that they personally suffered harm as a result of the company’s actions. 

What to Consider When Deciding Which to File

If you are unsure whether you should file a derivative or direct shareholder lawsuit, there are at least five things you need to consider to ensure that you are making the right decision.   

1. The Nature of the Claim

The first thing to understand when deciding whether to file a derivative or direct shareholder lawsuit is the nature of your claim. Derivative lawsuits are typically used to address the harm done to the company as a whole, such as fraud or breach of fiduciary duty by the company’s executives.  

Direct shareholder lawsuits, on the other hand, are filed by the shareholder on their own behalf, and typically address the harm done to the shareholder directly, such as a decrease in the value of their shares due to mismanagement by the company. If your claim is related to the harm caused to the company as a whole, a derivative lawsuit may be more appropriate. A direct shareholder lawsuit may be best if your claim is more individualized. 

2. The Jurisdiction

Secondly, you need to know the jurisdiction in which you will be filing the lawsuit. Some states have different rules regarding derivative and direct shareholder lawsuits, and it is vital to be aware of these differences. For example, in some states, shareholders must first make a demand on the company’s board of directors to address the issue before filing a derivative lawsuit, while in other states, such a demand is not required. You will need to consult with an attorney to understand the rules of the jurisdiction where you will be filing the lawsuit. 

3. The Potential Recovery 

When deciding whether to file a derivative or direct shareholder lawsuit, it is critical to consider the potential recovery. Derivative lawsuits usually result in changes to how the company is run, with any monetary damages recovered going to the company rather than individual shareholders. Direct shareholder lawsuits, on the other hand, can result in monetary damages being awarded directly to individual shareholders. If you are primarily interested in monetary damages, a direct shareholder lawsuit will be the better option. 

4. The Costs

Another aspect to consider when deciding which type of lawsuit to file is the costs involved. Derivative lawsuits are typically paid for by the corporation, with the shareholder’s costs being covered, only if the lawsuit is successful. Direct shareholder lawsuits, on the other hand, are usually paid for by the shareholder, with any monetary damages recovered going to the shareholder rather than the corporation. 

5. The Timeline

Lastly, you need to analyze the timeline for each type of lawsuit. Derivative lawsuits can take longer to resolve because they involve the corporation as a whole, while direct shareholder lawsuits can be resolved more quickly because they involve only the individual shareholder. If time is a concern, a direct shareholder lawsuit is the better option. 

Hire a Strategic & Reputable Attorney Today

The reputable and knowledgeable attorney at The Parzivand Law Firm, PLLC, has handled numerous derivative and direct shareholder lawsuits on behalf of his clients in Stafford, Texas, and throughout Fort Bend County. If you are a shareholder considering filing a lawsuit on behalf of or against your company, get legal guidance about your best course of action. Reach out today to request an informative consultation.