What is a derivative lawsuit in California, and how can a derivative lawsuit protect the interests of minority shareholders and investors in a corporation?  What happens when the actions of leadership or majority interests threaten the viability or direction of your company?

3 Key Takeaways to Help Understand What is a Derivative Lawsuit in California?

• A derivative lawsuit is one of the final options in an ongoing dispute.  It allows a minority shareholder to bring a lawsuit on behalf of the corporation itself against majority interests.
• There are very extensive and specific requirements under California law regarding a derivative lawsuit, and when they can be brought.  These actions protect the company, the business entity itself, from the actions, wrong actions, or inaction of its majority ownership.  All proceeds from a derivative lawsuit go to the company, not to the individuals who brought the derivative action.
• This is why it is important to work with an experienced, proven shareholders’ rights and shareholder dispute attorney from the Watkins Firm.  There are many alternatives to resolve these disputes, and your Watkins Firm attorney can help you to understand available options, and how to accomplish your goals and objectives in a timely and cost-efficient manner.

Holding the Management of Your Corporation Accountable While Protecting Your Investment and Interests

What is a derivative lawsuit in California?  A derivative lawsuit is an effective tool for holding the management of your corporation accountable while protecting your investment and interests as a minority shareholder.  Under California corporate law, the management of a company is usually responsible for filing lawsuits against others and defending legal actions against the corporate entity itself.  There are occasions where individual shareholders, (usually in minority ownership positions) must bring an action against a third party on behalf of the company because the management of the corporate entity has failed to do so.  Often that “third party” is the majority shareholder(s), executives or Board of Directors of the corporation itself.

These are known as “derivative lawsuits” and are a unique form of shareholder dispute.  There are specific requirements that must be met under California law for a shareholder to file a derivative lawsuit.  Derivative lawsuits do not benefit the shareholder who brings them. They are brought on behalf of the company, and the company will enjoy any benefit that comes out of the lawsuit.

When Should You Consider a Derivative Lawsuit in San Diego and Southern California?

When should you as a shareholder consider a derivative lawsuit in San Diego and Southern California? In most cases, derivative lawsuits in San Diego are brought be shareholders who are concerned about the actions of the Board of Directors, or a specific corporate officer or shareholder.  You may feel that the officer(s) or board of directors have a conflict of interest that is preventing them from taking the necessary action.

You may feel the decisions of those in authority are a threat to the best interests or profitability of the organization.  A proposed merger or substantial transaction may not be in the best interests of the corporation itself.  These are complex matters, and the Watkins Firm has decades of experience in shareholder disputes including derivative actions.

Pro-Tip: “Well, shareholders just want to be treated just like other shareholders. And so when you don’t have these safeguards in place, it’s very tempting for management to say, well, technically I going to pay me myself more. Technically I need a new car. And technically the company should lease me a house to stay in. And technically this, when, if you would had a request that certain things be in place before you invest a substantial amount of money, they may have said, yes, I don’t want executive compensation to exceed so much of the EBITDA, simple things like that could be requested. If they say, no, you keep your money.

What we’re describing is basically a balance of legal stipulations and responsibilities with a simple sense of fairness. Don’t let the term shareholder or investor make you think you don’t have any rights. They make an offer to sell shares at a certain price and you come along and just say, yes. I mean, that’s, that’s how my wife used to buy cars!

Well, we like to say, if it’s off a penny, it’s off a million. So we look at the financial disclosures you’ve given, and if they don’t add up or doesn’t seem straightforward, we suggest you demand for documentation. And if they don’t give it, that’s sort of like them pleading the fifth, something’s wrong when they’re not willing to give their investors, their owners full access, full transparency into what’s going on with the company.

So that sense that you have that something’s just not right. That should also be a sense that maybe I should get some help. And you should do it right away. because, when shareholder fraud or shareholder breach happens, it’s usually for a purpose, some opportunity for management. And it’s about a lot of money and it’s usually happening right.

Majority interests aren’t going to do something unless it’s worth something. If let’s say you don’t have a shareholder agreement, or you have a weak shareholder agreement and, management has broad discretion to do a lot of things, and they’re getting ready to do some questionable things, to make a big profit. And you come along and say, ‘wait a minute, I think something’s wrong here.’ And you pose an objection. Well, before you file a lawsuit, this opportunity that management has is still there. So if you are the squeaky wheel right away, before they go forward with whatever they’re doing, then you may profit from that. But if you’re not, then it’ll just happen. And instead of being sharing in the profits, you’ll be fighting to claim you had rights to get some money back.” – Dan Watkins, Founding Partner

Protecting the Interests of Shareholders for More than 40 Years

The Watkins Firm has been protecting the interests of shareholders throughout San Diego and throughout California for more than 40 years.  If you are genuinely concerned about a the direction of your corporation or the actions of its management or board of directors as a minority interest or shareholder we invite you to review our Podcast Episode 14 – Shareholders’ Rights and Disputes, the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.

We will discuss the circumstances that concern you, and ultimately work with you and build a strategy to review the associated documentation (corporate bylaws, shareholder’s agreements, etc.), and engage the dispute in a manner that reflects your goals and objectives, and which holds the greatest opportunity for successful resolution.