A derivative action refers to a type of business/corporate lawsuit. They are equitable actions which “place in the hands of the individual shareholder a means to protect the interests of the corporation from the malfeasance of faithless directors and managers.” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991). In essence, it is a procedural mechanism which allows shareholders to sue on behalf of a corporation for injuries to the corporation caused by directors and managers. Among other things, derivative actions allow shareholders to maintain an action for the recovery of corporate funds or property improperly diverted or appropriated by the corporation’s officers and directors. Place v. P.M. Stores Co., 950 S.W.2d 862, 865 (Mo. Ct. App. 1996). The injury is to the corporation and shareholders collectively; thus, the plaintiff-shareholder bringing the suit must demonstrate that he/she may adequately and fairly represent the interests of all similar situated shareholders.
In Missouri, there are special court rules relating to derivative actions. Missouri Supreme Court Rule 52.09 requires that a derivative action ” shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to the shareholders or members in such a manner as the court directs.” The purpose of the notice and approval requirements is that it prevents parties from reaching a collusive settlement that benefits the plaintiff-shareholders, but not the corporation and non-party shareholders. Absent the notice and court approval requirements, it would be simple for the alleged wrongdoers to “buy off” the plaintiff-corporate representative. Similarly, the notice and approval requirements protect the corporation and non-party shareholders in the event that the plaintiff-shareholder enters into an agreement which is not in the corporation’s best interests.
Functionally, how does this look? First, once a settlement is reached in a derivative action, the proposal is submitted to the Court for review with notice to all shareholders. Second, the court will set it for hearing and provide further notice to absent shareholders indicating a time to intervene and/or consent to the proposal. Third and finally, the court will conduct a hearing to determine whether the settlement is fair and reasonable and in the best interest of the corporation. The court has discretion in making this determination.
Why is it important to give notice to non-party shareholders? To start, it’s required by Missouri Supreme Court Rules. But more importantly, from a defendant’s/director’s perspective, if notice is not given, then they may be sued for an identical claim asserted by a different shareholder at a later date. Therefore, it is important to prevent the re-litigation of the same issue and provide finality to the matter.
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