A derivative lawsuit is when a shareholder sues directors on behalf of the corporation for some impropriety. It is termed a “derivative” lawsuit because the lawsuit arises out of the individual shareholder’s ownership of shares in the company. Most types of derivative lawsuits allege mismanagement against the directors or other specific instances of fiduciary misconduct for failing to act in the corporation’s best interests. Derivative lawsuits can occur with essentially all corporations, whether publicly traded, closely held, etc.
In Missouri, several procedural hurdles must be met to maintain a derivative suit. Under Rule 52.09, the shareholder must establish that (1) he or she was a shareholder at the time of the complained-of action, (2) have served demand upon the board of directors and, if necessary, the shareholder as a whole, and (3) adequately represent the interests of all shareholders. Items (1) and (3) are relatively easy to meet. Item (2) is more complex.
For item (2), the shareholder must demonstrate “that he has exhausted all remedies and reasonable efforts within the corporation: that he has no other avenue of recovery” but filing the lawsuit. McLeese v. J.C. Nichols Co., 842 S.W.2d 115, 119 (Mo. Ct. App. 1992). This amounts to a showing that the shareholder has made demand upon the board of directors to take action and, that effort failing, he has made similar demand upon the shareholders. Saigh ex rel. Anheuser Busch, 396 S.W.2d 9, 17 (Mo. Ct. App. 1965). There is an exception to this requirement if the shareholder pleads “‘a state of facts from which it appears that such demand or effort within the corporation and through corporate channels would have been futile and unavailing.’” Id. If a shareholder seeks to utilize the exception to the demand requirement, it is very important to be specific as to why demands would be futile.
Contact with questions.