Series 66: 2.1.1.8 Right To Sue For Wrongful Acts

2.1.1.8  Right to Sue for Wrongful Acts

Another right held by common shareholders is the right to sue management of the issuing company. A shareholder derivative suit is a lawsuit brought by a shareholder individually—or as part of a class action suit—on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director. Derivative suits are generally brought to address fraud or mismanagement that has been ignored by the officers of the corporation.

An example of possible grounds for such a lawsuit would be a company significantly overstating its earnings, thereby giving shareholders and investors an erroneous view of its financial health. These suits generally seek to protect shareholders’ long-term interests by imposing corrective changes in governance rather than by obtaining monetary damages.