A shareholder derivative lawsuit is one brought by a shareholder on behalf of the corporation when that corporation has a valid cause of action and the corporation refuses to act on it. These types of suits are typically brought against an insider in the corporation, such as officers, directors or board members who are suspected of misconduct. All directors and officers owe fiduciary duties to the corporation. These duties include:
- Duty of loyalty
- Duty of care
These duties require the officers and directors to obey the law and act in the best interest of the corporation, and not to act in self-interest. Types of misconduct that can lead to shareholder derivative suits include:
- Insider trading
- Fraud or other unlawful activity
- Breaches of fiduciary duty
- Conflict of interest
- Excessive executive compensation
- Corporate waste
- Options backdating
- Accounting scandals
- False or misleading financial statements
- Management or board decisions that expose the company to undue risk
Any misconduct that affects the corporation can negatively affect the individual shareholders. For this reason, instead of bringing an action as an individual to recover damages, the shareholder may address the loss in a different angle and allow the corporation to clean up its act for better operations in the future. Any proceeds of the lawsuit go to the corporation, not to the shareholder that brought the action.
Standing Requirements in Wisconsin Shareholder Derivative Lawsuits
Like all states, Wisconsin has distinct laws addressing shareholder derivative lawsuits. Wisconsin statutes require that a person bringing a shareholder derivative suit must have shares held in a voting trust or held by a nominee on the person’s behalf. In order to bring a shareholder derivative lawsuit, the shareholder must have “standing.” In Wisconsin, a shareholder has standing:
- If he or she was a shareholder or beneficial owner of the corporation at the time of the misconduct that is being complained of, or became a shareholder or beneficial owner through transfer by operation of law from a person who was a shareholder or beneficial owner at that time.
- If the shareholder fairly represents the interests of the corporation, not just for personal advantage.
Notice Requirements in Wisconsin Shareholder Derivative Lawsuits
Before shareholders may bring a derivative lawsuit against the corporation, they must first provide a written demand to the corporation asking the corporation to take appropriate action. The shareholders must then wait 90 days before filing a lawsuit unless the corporation rejects the demand or unless irreparable harm to the corporation would result by waiting that 90-day period.
Court Intervention in Wisconsin Shareholder Derivative Lawsuits
Depending on the circumstances leading up to the derivative suit, the court may appoint a panel of one or more independent persons to determine whether bringing the derivative suit is in the best interests of the corporation.
Before a shareholder derivative lawsuit may be discontinued or settled, court approval is required. If it is determined that a discontinuance or settlement will substantially affect the interests of the beneficial owners or shareholders of the corporation, the court will require that those individuals are notified prior to settlement or discontinuance.