{"id":4507,"date":"2018-07-10T09:03:47","date_gmt":"2018-07-10T14:03:47","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/business-laws-and-regulations\/shareholder-rights-and-derivative-actions.html"},"modified":"2024-06-06T01:53:17","modified_gmt":"2024-06-06T06:53:17","slug":"shareholder-rights-and-derivative-actions","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/business-laws-and-regulations\/shareholder-rights-and-derivative-actions.html","title":{"rendered":"Shareholder Rights and Derivative Actions"},"content":{"rendered":"\n
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Shareholder Rights and Derivative Actions<\/h1>\n
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\n By Jade Chounlamountry, Esq.<\/a> | Legally reviewed by Aviana Cooper, Esq.<\/a>\n | Last reviewed\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Shareholder rights play an essential role in shaping the operation of a company.<\/p>\r\n

One of the ways that shareholders exercise their rights is through derivative actions. This article explores shareholder rights and derivative actions for small businesses. It shows how this cause of action empowers shareholders to protect their interests.<\/p>\r\n

Corporate Roles<\/h2>\r\n

The corporate shareholders are investors who own parts of the corporation. The directors<\/a> have obligations and duties to the shareholders and the corporation. This role differs from the officers and executives who handle corporate governance<\/a>. But, the roles can overlap.<\/p>\r\n

A company trusts the board of directors to make critical decisions in the best interests of the corporation and its shareholders. Fiduciary duties<\/a>, including the duty of care and loyalty, legally bind them. The duty of care entails making informed decisions and diligently overseeing company matters. The duty of loyalty means putting the corporation’s best interests before personal gain. It also requires the board to avoid conflicts of interest.<\/p>\r\n

When board decisions deviate from these duties, shareholders can file a derivative action. This holds the wrongdoers accountable and seeks to repair the harm caused to the corporation.<\/p>\r\n

Direct Actions vs. Derivative Actions<\/h2>\r\n

A shareholder brings a direct action to address the harm to their rights as a shareholder. For example, violations of their ownership rights or dividend entitlements. Direct actions focus on protecting the individual shareholder’s interests.<\/p>\r\n

Derivative actions concern the corporation’s overall well-being and governance. A shareholder initiates a derivative action on behalf of the corporation when there has been an alleged breach of fiduciary duty. Generally, this concerns actions by corporate directors or officers. This type of case aims to remedy harm to the company, with any resulting damages benefiting the corporation.<\/p>\r\n

Derivative Actions and Shareholder Rights<\/h2>\r\n

Shareholders hold ownership in a corporation. Shareholders exist whether it’s a closely held corporation, LLC, or another business entity. Their collective ownership implies certain rights and privileges to include:<\/p>\r\n